The outlook What is the global economic outlook? Paul van den Noord Counselor to the Chief Economist The outlook Real GDP growth, in per cent United States.... Euro area. -. -.. Japan -.... Total OECD.... Brazil.... China 9....9 India...9. Indonesia.... Russian Federation.... South Africa.... Source: OECD Economic Outlook 9 database.
Projections Projections Projections - OECD Big Annualised quarterly real GDP growth, in per cent - - - - - - United States Euro area Japan 9 - - Source: OECD Economic Outlook 9 database. Projections - EMEs Annualised quarterly real GDP growth, in per cent - - - - China Indonesia India Russia OECD 9 - - - - Source: OECD Economic Outlook 9 database.
Downside risks Unemployment Unemployment rates diverging Percentage of labour force United States Euro area Japan 9 Source: OECD Economic Outlook 9 database. Downside risks to the outlook Euro area crisis is the largest downside risk : o Policy measures (OMT, ESM) have dampened market pressures but risks of further flare ups remain. o Negative financial feed-back loops still operational. o Underlying rebalancing still in progress. Excessive budgetary tightening in the United States (the fiscal cliff ) Geopolitical risk to oil prices High unemployment undermining confidence EMEs transition to domestic sources of growth
t- t- t- t- t- t t+ t+ t+ t+ t+ t+ t+ t+ t+9 t+ t+ t+ t+ t+ t+ t+ t+ t+ t+9 Recoveries compared Upside risks Upside risks to the outlook Comprehensive resolution of euro area crisis Medium-term fiscal framework agreed for United States, and releasing pent up demand Structural reform benefits flowing through earlier than assumed Recoveries compared Cumulative change in OECD-wide output gap from quarter t 9s: GDP peak at t = 9Q 9s: GDP peak at t = 9Q s: GDP peak at t = Q - - - - - - - - Source: OECD Economic Outlook 9 database.
Deleveraging Slow recovery Reasons for the slow recovery Private sector deleveraging : o More advanced in the US, less in the euro area but mixed. Fiscal consolidation : o Fiscal consolidation, while necessary, has affected growth. Euro area crisis : o Crisis has dragged on longer than necessary due to insufficient and delayed policy action. EMEs slowdown : o Domestic factors and only partly induced by euro area crisis. 9 Deleveraging is progressing Household gross debt, in percent of net disposable income 9 United States Japan Euro area 99 99 999 9 9 Note: Data for USA and Japan are not consolidated. For Japan, net disposable income for the year is an estimate from the OECD Economic Outlook 9 database. Source: OECD Annual National Accounts, and OECD Economic Outlook 9 database.
Consumer confidence Jan- Jul- Jan-9 Jul-9 Jan- Jul- Jan- Jul- Jan- Jul- Jan- Jul- Jan-9 Jul-9 Jan- Jul- Jan- Jul- Jan- Jul- Business sentiment Business sentiment is mixed Purchasing Managers Index (PMI) for manufacturing United States Euro zone Japan Brasil China India Source: Markit. Consumer confidence is weak Consumer confidence survey indicators, standard deviations United States. Euro area Japan. -. -. - - -. -. - - -. -. - 9 - Note: Normalised at 999M to M period average and presented in units of standard deviation. Values above zero signify levels of consumer confidence above the period average. Source: Datastream, and European Commission.
Euro area impact on trade World trade World trade has stopped growing CPB indicator of world merchandise trade, = 9 9 9 Source: CPB. Euro area trade spillovers on emerging economies Percentage points -. -. -. -. -. -. -. -. -. -. -. -. -. -. -.9 Change in GDP growth contribution due to direct effects of changes in export growth to euro area, first half of relative to first half of. Brazil Indonesia China India Russia South Africa -. -. -.9 Source: OECD Economic Outlook 9, and OECD calculations.
Unit labour costs Euro area cost of credit The cost of credit among euro area countries has diverged Bank interest rates for lending to business, percent France Greece Germany Ireland Italy Portugal Netherlands Spain 9 9 Note: Cost of credit is defined as interest rates on new loans to non-financial corporations (all maturities) with the exception of Greece where it refers to new loans with maturity of up to one year. Last observation is September. Source: European Central Bank. Euro area unit labour costs Index = Germany Spain France Greece Ireland Italy Portugal 9 9 Note: The figures shown are for whole economy unit labour costs. If wage developments in the public sector diverge from those in the rest of the economy, changes in private sector costs may differ from those shown. This may mean that economy-wide labour costs are falling more sharply than private sector costs in the EU/IMF programme countries. Source: OECD Economic Outlook 9 database.
Downside scenario Rebalancing in the euro area Rebalancing in the euro area countries Current account balances, in per cent of GDP Greece Portugal Spain - - - - - - - Italy - - - - - - - Ireland cyclically adjusted Germany - - Note: Assuming the economy s cyclical position is the same as that of its (trade weighted) trading partners. Source: OECD Economic Outlook 9 database, and OECD calculations. - - - - - - - - Downside risks from intensification of euro area crisis Euro area Japan GDP growth, per cent United States OECD - - - - - - - - Source: OECD calculations. Baseline projection Intensified euro area crisis affecting global financial markets 9
Euro area bank capitalisation Policies for the euro area Policies for the euro area Break feedback loop between banks and governments : o Strengthen capital position of banks. o Banking union (single supervisor, bank resolution, common deposit insurance, common fiscal backstop). Break feedback loop between exit risk, bond yields and debt sustainability : o Commitment to reforms and ESM/OMT. o Fiscal Compact. o Deal with legacy debt. Boost growth : o Structural reforms and Single Market. 9 Capital positions of euro area banks need strengthening Required increases in capital of large banks to reach a % leverage ratio, in percent of GDP PRT ITA AUT ESP IRL EURO AREA FIN NLD DEU BEL FRA GRC Note: Based on around euro area banks. The number of banks in the sample for each country displayed and the corresponding number of banks with less than % leverage ratio (in brackets) are as follows: Austria 9 (), Belgium 9 (), Finland (), France (), Germany (), Greece 9 (), Ireland (), Italy (), Netherlands 9 (), Portugal () and Spain (). Source: Company Reports, and OECD.
Monetary policy Upside for the euro area Upside for the euro area Fiscal consolidation is progressing : o Immediately beyond the forecast period, debt-to-gdp ratios falling in most euro area countries, boosting confidence. Structural reforms may have larger than expected positive short-run effects Progress with institution building may proceed more rapidly than expected and have strong confidence effects Monetary policy Further easing required in Japan, euro area and some EMEs. United States should keep current stance If downside risks materialise, a stronger response would be warranted : o Including further quantitative easing, and forward guidance. Caveats : o Creating conditions for high leverage and bubbles. o Misallocation of credit as costs of forbearance and ever-greening fall.
Fiscal policy Fiscal policy Fiscal policy () Multipliers are likely to be high at the current juncture : o Significant weight on expenditure cuts. o Limited room for monetary easing and impaired financial system. o Simultaneous consolidations across countries. General recommendations : o Choose an appropriate pace of consolidation. o Let automatic stabilizers play around structural consolidation path. o Countries with space should ease if downside materialises. United States : link fiscal cliff resolution to medium term consolidation Euro area : more effectiveness by coordinated action Fiscal policy () Consolidation needs to balance : o Short-term demand impact. o Social impact. o Long-term growth impact. Mix of consolidation instruments can improve tradeoffs Preferred instruments : o Reduce tax breaks to wealthy and cut un-warranted tax expenditures. o Increase taxes on real estate and energy in some countries. o Shift taxes from labour to consumption. o Tackle public spending inefficiencies. Consolidation and inequality o Transfers versus taxes.
Long-term scenario and policy Long-term scenario Long-term shift in the composition of global GDP China, % India, % United States, % Percentage of global trend GDP, PPPs Japan, % Other non- OECD, % Other OECD, % Euro area, % China, % India, % United States, % Euro area, % Japan, % Other non-oecd, % Other OECD, % India, % China, % United States, % Japan, % Euro area, 9% Other OECD, % Note: Global GDP is taken as the sum of GDP for OECD and non-oecd G countries. Source: Johansson, Å., et al. (), OECD Economic Policy Papers, No.. Other non- OECD, % Long-term developments and policy implications Long-term global developments : o Growth will be sustained by emerging economies but at a declining rate. o Relative sizes of economies will shift dramatically. o GDP per capita gaps will narrow, but differences will persist. o Saving will decline in line with demographics. o Current account imbalances may build up. Role of policy : o Product market reforms will speed income convergence. o Labour market and retirement reforms and rising education levels will lift long-run GDP. o Ambitious fiscal consolidation and structural reforms would reduce imbalances and boost growth.
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