OECD Interim Global Economic Assessment

15th September 2014, Paris

Rintaro Tamaki, Deputy Secretary-General & Acting Chief Economist

OECD INTERIM GLOBAL ECONOMIC ASSESSMENT

http://www.oecd.org/economy/economicoutlook.htm

Global growth, though bumpy, continues at a moderate pace

2

World GDP Percentage change, seasonally adjusted

annualised rate

Source: OECD National Accounts database.

Global PMI Index

Note: Values above 50 indicate expansion. Source: Markit.

0

1

2

3

4

5

0

1

2

3

4

5

48

50

52

54

56

58

48

50

52

54

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58

Presenter

Presentation Notes

GLOBAL GROWTH IN THE FIRST HALF OF THE YEAR (3% ANNUALISED) WAS IN LINE WITH OUR PROJECTIONS IN THE MAY ECONOMIC OUTLOOK. BUT THE PROFILE WAS UNEVEN, WITH SEVERE WEATHER IN NORTH AMERICA SKEWING THE NORMAL SEASONAL PATTERN THERE AND THE INCREASE IN THE CONSUMPTION TAX RATE IN JAPAN CREATING UNEXPECTEDLY VOLATILE QUARTERLY GROWTH OUTCOMES. GLOBAL GROWTH WAS IN LINE WITH RECENT YEARS – THAT IS, THE RECOVERY CONTINUED AT A MODERATE RATE – AND THE GLOBAL PMI LIKEWISE REMAINED WELL ABOVE 50 AND BROADLY STABLE.

Trade growth remains sluggish

Volumes, year-on-year percentage change

Global trade in goods and services


3

-20

-15

-10

-5

0

5

10

15

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-20

-15

-10

-5

0

5

10

15

20

Pre-crisis average (1990-2007)

Presenter

Presentation Notes

THE CONTINUED MODERATE RECOVERY OF GLOBAL OUTPUT WAS NOT SUFFICIENT TO BOOST GLOBAL TRADE GROWTH. THE VOLUME OF GOODS AND SERVICES TRADE CONTINUED TO GROW AT RATES SIMILAR TO THE PREVIOUS COUPLE OF YEARS, WHICH IS TO SAY SIGNIFICANTLY MORE SLOWLY THAN THE AVERAGE GROWTH RATE IN THE PRE-CRISIS PERIOD. THERE IS NO DOUBT SOME CAUSALITY IN BOTH DIRECTIONS: A LACK OF DYNAMISM IN TRADE HINDERS ECONOMIC GROWTH, AND TEPID OUTPUT GROWTH DEPRESSES TRADE GROWTH. IT IS ESSENTIAL THAT COUNTRIES AVOID INCREASING BARRIERS TO TRADE AND THAT THEY PURSUE TRADE FACILITATION.

Labour market slack is still substantial in the advanced economies

OECD employment Per cent of working age population

Real wages and labour productivity Annualised percentage change, Q2 2009 – Q1 2014

4

Note: Real wage is employee compensation divided by total hours worked in the economy, deflated by the CPI. Labour productivity is real GDP divided by hours worked. Source: OECD calculations based on quarterly national accounts and OECD May 2014 Economic Outlook database .

Source: OECD May 2014 Economic Outlook database .

53

54

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56

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53

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55

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57

-0.5

0.0

0.5

1.0

1.5

-0.5

0.0

0.5

1.0

1.5

United States Japan Euro area

Real wage Labour productivity

Presenter

Presentation Notes

THE MODERATE RECOVERY HAS ALSO BEEN INSUFFICIENT TO ELIMINATE THE STILL-LARGE DEGREE OF SLACK IN ADVANCED ECONOMY LABOUR MARKETS. AS NOTED IN THE RECENTLY RELEASED OECD EMPLOYMENT OUTLOOK, Almost 45m people are without work in the OECD area, nearly 12 million more than just before the crisis. Long-term unemployment is up even more: more than 16 million people were out of work for at least a year in Q1 2014, up from 8.7 million before the crisis. AS SHOWN IN THE FIRST CHART, THE EMPLOYMENT RATE IN OECD COUNTRIES REMAINS WELL BELOW ITS PRE-CRISIS LEVELS, AND HAS RISEN ONLY SLIGHTLY IN THE PAST FEW YEARS. REAL WAGE GROWTH HAS ALSO BEEN WEAK, AVERAGING LESS THAN 1% A YEAR IN THE US SINCE THE TROUGH OF THE CRISIS, WHILE IN JAPAN AND THE EURO AREA AVERAGE WAGE GROWTH HAS EVEN BEEN NEGATIVE IN THAT PERIOD. IN ALL THE MAJOR REGIONS, WAGE GROWTH HAS LAGGED LABOUR PRODUCTIVITY BY A SIGNIFICANT MARGIN.

There are signs of a stabilisation of growth rates in emerging market economies

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GDP growth and Composite PMI

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-4

-2

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40

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60Per cent Index

Emerging Markets PMI (LHS)

BRIICS GDP growth (s.a.a.r.; RHS)

Note: PMI values above 50 indicate expansion. Source: HSBC; Markit; OECD National Accounts database; and OECD calculations.

Presenter

Presentation Notes

THE MAIN BRIGHT SPOT IN RECENT GROWTH INDICATIONS IN THE GLOBAL ECONOMY IS THE EMERGING ECONOMIES. AFTER SLOWING FROM 2010 ONWARDS, AVERAGE GROWTH RATES FOR THE BRIICS (BRAZIL, RUSSIA, INDIA, INDONESIA, CHINA AND SOUTH AFRICA) SHOWS SIGNS OF STABILISING, AND THE RECENT PICK-UP IN THE EMERGING MARKETS PMI SUGGESTS A POSSIBLE UPTURN IN AVERAGE BRIICS GROWTH IN THE COMING QUARTERS. THE STABILISATION FOR THE EMES AS A GROUP DOES NOT, OF COURSE, MEAN THAT THIS IS TRUE FOR ALL EMERGING ECONOMIES.

OECD interim forecasts -- GDP growth in the major economies

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China India Brazil

Per cent Per cent

2013 2014 2015

Source: OECD Interim Forecast.

-1.0-0.50.00.51.01.52.02.53.03.5

-1.0-0.50.00.51.01.52.02.53.03.5

United States Euro area Japan

Per cent Per cent

2013 2014 2015

GDP growth Per cent

7

OECD interim forecasts

Note: GDP at market value adjusted for working days. For Germany and India, this measure may differ from national headline measures.

Column1 2013 2014 2015United States 2.2 2.1 3.1Euro area -0.4 0.8 1.1Japan 1.6 0.9 1.1Germany 0.2 1.5 1.5France 0.4 0.4 1.0Italy -1.8 -0.4 0.1United Kingdom 1.8 3.1 2.8Canada 2.0 2.3 2.7

China 7.7 7.4 7.3India 4.7 5.7 5.9Brazil 2.5 0.3 1.4

Presenter

Presentation Notes

Most major economies look on track to achieve satisfactory near-term outcomes US – moderate underlying expansion seen as intact after weather-affected first quarter and sharp second quarter rebound Japan – consumption tax hike resulted in volatile demand in the first half, but underlying recovery expected to reassert itself UK and Canada – growth to remain solid, in line with previous projections China – growth picking up after a weak first quarter, with policy stimulus offsetting domestic headwinds India – improved confidence supporting stronger growth BUT Euro area – cycle of feeble growth, excessively low inflation and rising debt burdens will be hard to break Brazil – investment very weak, while above-target inflation limits scope for easing monetary policy BEGIN TO DISCUSS RISKS TO BASELINE SCENARIO HERE. Then go to next slide to illustrate disconnect with financial market behaviour Important risks (incl geopolitical) remain present, but asset prices are high and volatility very low. Spreads on higher-risk debt are also at exceptionally low levels. Is risk being underpriced?

The bullishness of financial markets belies the presence of substantial risks

.

Share prices Indices, Jan 2005 = 100

Implied share price volatility Per cent

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Note: Series shown are the MSCI World and Emerging Markets indices. The MSCI World Index covers 23 developed markets and the MSCI Emerging Markets Index 23 emerging markets. Source: Datastream.

Source: Datastream.

0102030405060708090100

0102030405060708090

100United States:VIX index

Euro area:VSTOXX index

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250

Developed markets

Emerging markets

Presenter

Presentation Notes

Can mention that investors in the real economy appear more cautious and fearful than those in financial markets.

In the euro area, projected growth is too weak to reduce economic slack

Output gap Per cent of potential output

.

9

Source: OECD May 2014 Economic Outlook; OECD Interim Forecasts, and OECD calculations.

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-3

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-1

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-3

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-1

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2012 2013 2014 2015

The OECD does not project euro area deflation, but the risk has risen

Consumer price inflation Year-on-year, per cent

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Source: Eurostat.

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Euro area Germany France Italy Spain Greece

Presenter

Presentation Notes

NOT ONLY IS THE BASELINE BAD, BUT THERE IS A SUBSTANTIAL RISK THAT THINGS COULD GET WORSE AGAIN, INSTEAD OF SOMEWHAT BETTER AS WE PROJECT. INFLATION HAS BEEN FALLING AND IS DANGEROUSLY CLOSE TO FALLING INTO NEGATIVE TERRITORY

Global policy requirements

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Ease structural constraints to economic growth

Tailor monetary policy to country-specific circumstances, which are diverging

Ensure that public debt burdens are sustainable – for many countries, that means further fiscal consolidation

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Presenter

Presentation Notes

INCREASINGLY VARIED CYCLICAL POSITIONS MEANS THAT THE NECESSARY MACRO POLICY SETTINGS ARE DIVERGING. THE EURO AREA NEEDS MORE VIGOROUS MONETARY STIMULUS WHEREAS THE US AND THE UK ARE RIGHTLY WINDING DOWN THEIR UNCONVENTIONAL MONETARY EASING. JAPAN STILL NEEDS QE TO SECURE A LASTING BREAK WITH DEFLATION, BUT DOES NOT FACE AN OUTPUT GAP AND MUST MAKE MORE RAPID PROGRESS ON FISCAL CONSOLIDATION THAN MOST OTHER COUNTRIES.

The euro area needs more monetary support

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Recent ECB action is welcome, but further measures, including QE, are warranted

Use all flexibility allowed under the union’s fiscal rules

The completion of the banking union and the effective and credible assessment of banks are both critical

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Other major central banks have eased more aggressively

Central bank assets as per cent of GDP

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60

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60United States Euro area Japan

Source: Datastream.

Japan’s multi-pronged approach should be maintained

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Continue monetary expansion to achieve the 2% inflation target

Follow through on second consumption tax hike to advance fiscal consolidation; use short-term measures, particularly further monetary expansion, to cushion negative effects

Legislate and implement announced structural reform

Wages are now picking up Hourly earnings index, 2010 = 100

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103

Source: OECD Main Economic Indicators.

Presenter

Presentation Notes

CHART OF VACANCIES PER APPLICANT IS JUST AN ILLUSTRATION THAT THE ECONOMY IS BROADLY ON TRACK, AND THE POLICY MIX SHOULD BE MAINTAINED.

US policy stimulus is working

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Proceed with the intended withdrawal of monetary stimulus

Focus fiscal policy on medium-/ long-term sustainability

Use structural policies to pursue more inclusive growth, and increase public investment

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Nonfarm payroll growth is around pre-crisis levels

Thousands, 3-month moving average

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200

400 Pre-crisis average (2004-2007)

Source: U.S. Bureau of Labor Statistics.

Presenter

Presentation Notes

CHART ILLUSTRATES THAT THE LABOUR MARKET HAS BEEN NORMALISING, WITH EMPLOYMENT GROWTH IN LINE WITH PRE-CRISIS NORMS AND CONSISTENT WITH A STEADY REDUCTION IN UNEMPLOYMENT

China faces challenges in achieving an orderly slowdown

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Ensuring an orderly real estate market correction is critical

Easing inflation provides ample room for policy stimulus if needed

Further efforts to make financial regulation more effective are needed

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Credit growth is being reined in Year on year, per cent

Note: Non-bank credit includes bankers acceptances, trust loans, entrusted loans and net corporate bond financing. Source: CEIC.

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15

30

45

60

75

10

14

18

22

26

30Total social financing (LHS)

Bank lending (LHS)

Non-bank credit (RHS)

India has the opportunity to achieve faster and more inclusive growth

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Improve fiscal consolidation by shifting from subsidies to investment in social and physical infrastructure

Control inflation and improve financial stability

Improve infrastructure, simplify labour laws and pursue tax reform

Growth has bottomed out Real GDP, year-on-year percentage change

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Brazil needs to revive investment

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Ensure inflation returns to the inflation target.

Increase the primary surplus as the economy recovers.

Pursue reforms that support investment, including tax simplification, accelerated infrastructure spending and lower trade barriers.

Investment is weak Investment volumes, year-on-year percentage change

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Source: Instituto Brasileiro de Geografia e Estatística.

-20

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Presenter

Presentation Notes

Brazil's economy continues on a trajectory of slow growth and high inflation. Uncertainties about economic policies, partly related to the upcoming elections, as well as structural constraints have reduced investment. On the macro side, delivering stable inflation and returning to higher primary fiscal surpluses as the economy recovers can improve confidence. In the area of fiscal policy, redesigning the fiscal rule to take account of the business cycle, for example by adopting an expenditure rule, would be one way to make a credible commitment. Additional options include cutting the automatic link between the fast-rising federal minimum wage and a significant number of social expenditure items, and reducing expenditures on the interest differential of directed loans, which continue to drive overall credit growth. On the structural side, investment incentives could be strengthened by reducing the complexity of taxes and reducing administrative burdens, accelerating infrastructure investment, fostering the development of private long-term credit markets and lowering trade barriers.

Key messages

The moderate economic expansion is forecast to continue in most major advanced and emerging economies

The euro area stands out as suffering from weak demand and risking prolonged stagnation

Macroeconomic policy needs across countries are diverging

Structural reforms are key to achieving more satisfactory global growth rates

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Economy & Finance

OECD Interim Global Economic Assessment