1

What is the near-term global economic outlook?

An interim assessment

Paris, 28th March 201311h00 Paris time

Pier Carlo PadoanOECD Deputy Secretary-General and Chief Economist

2

OverviewO

verv

iew

• The global growth outlook is improving after a weak end to 2012.

• The starting point and pace of improvement are worse for the euro area.

• Financial market advances are outstripping real indicators.

• Confidence is still not strong, especially in the euro area.

o Linked to high unemployment in many economies

• Policy action is still needed to support demand.

3

OECD interim forecastsIn

terim

Ass

essm

ent

2012 Q3 2012 Q4

United States 3.1 0.1

Japan -3.7 0.2

Germany 0.9 -2.3

France 0.7 -1.2

Italy -0.8 -3.7

United Kingdom 3.8 -1.2

Canada 0.7 0.6

G7 1.4 -0.5

Euro area 31 0.4 -2.3

Annualised quarter-on-quarter real GDP growth, per cent

2013 Q1 2013 Q2

3.5 2.0

3.2 2.2

2.3 2.6

-0.6 0.5

-1.6 -1.0

0.5 1.4

1.1 1.9

2.4 1.8

0.4 1.0

1. Weighted average of Germany, France and Italy.Source: OECD Quarterly National Accounts; and OECD Indicator Model forecasts.

4

The near-term outlook has improvedG

row

th p

roje

ction

s

G7 real GDPAnnualised quarter-on-quarter change, per cent

2012Q1 2012Q2 2012Q3 2012Q4 2013Q1 2013Q2

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

Source: OECD Main Economic Indicators and OECD Indicator Model forecasts.

5

Emerging economies continueto drive global growth

Cont

ributi

ons

to g

loba

l gro

wth

Contribution to annual world1 real GDP growthPercentage points

Source: OECD Main Economic Indicators and Economic Outlook 92.

2007 2008 2009 2010 2011 2012 2013-3

-2

-1

0

1

2

3

4

5

6

-3

-2

-1

0

1

2

3

4

5

6Emerging economies 2

OECD

Note: Calculated using moving nominal GDP weights, based on national GDP at purchasing power parity. 2013 reflects OECD projections from Economic Outlook 92.1. World GDP is proxied by the sum of OECD and the six large non-OECD emerging economies.2. Emerging economies are here Brazil, China, India, Indonesia, Russia and South Africa.

6

RisksRi

sks

Downside tail risks to growth are less pronounced than 6 months ago thanks to policy action in the major economies. Remaining negative risks include:

• The euro area recession and financial system fragility.

• Fiscal deadlock in the United States, although the short-term risk of disruptive consolidation has receded.

• A widening disconnect between asset prices and real activity signalling excessive risk taking.

7

Financial markets have advanced stronglyFi

nanc

ial m

arke

ts

Equity marketsIndex, August 2011 = 100

Corporate bond spreadsPer cent

85

95

105

115

125

135

145 United States

Euro area

Japan

01-S

ep-1

126

-Sep

-11

21-O

ct-1

115

-Nov

-11

10-D

ec-1

104

-Jan

-12

29-J

an-1

223

-Feb

-12

19-M

ar-1

213

-Apr

-12

08-M

ay-1

202

-Jun

-12

27-J

un-1

222

-Jul

-12

16-A

ug-1

210

-Sep

-12

05-O

ct-1

230

-Oct

-12

24-N

ov-1

219

-Dec

-12

13-J

an-1

307

-Feb

-13

04-M

ar-1

3

0

2

4

6

8

10

12

14

0

2

4

6

8

10

12

14Euro area BBBEuro area high yieldUnited States high yieldUnited States BBB

Note: High-yield bonds (Merrill Lynch indices) less government bond yields (10-year benchmark bonds); corporate BBB-rated bond yields (Merrill Lynch - average for 5-7 & 7-10 years) less average government bond yields of same maturities. Last observation: 22-03-2013.Source: Datastream; OECD calculations.

Note: S&P 500 Composite for the United States, Nikkei 225 for Japan, FTSE Eurotop 100 for euro area. Last observation: 21-03-2013.Source: Datastream.

8

Confidence indicators are mixed Bu

sine

ss c

onfid

ence

Business confidencePMI indicators

Consumer confidenceNormalised indices

25

30

35

40

45

50

55

60

65

70

United StatesEuro areaJapan

-3

-2

-1

0

1

2

3United StatesEuro areaJapan

Standard deviations

Note: Normalised at period average and presented in units of standard deviation. Values above zero signify levels of consumer confidence above the period average.Source: OECD Main Economic Indicators.

Note: Index, values above 50 indicating expansion.

Source: Markit Economics Limited.

9

Employment has yet to rebound strongly, especially in the euro area

Labo

ur m

arke

t con

ditio

ns

Unemployment ratePer cent

Employment ratePer cent of working age population

2008q1

2008q3

2009q1

2009q3

2010q1

2010q3

2011q1

2011q3

2012q1

2012q359

61

63

65

67

69

71

73

United StatesEuro areaJapan

Source: OECD Main Economic Indicators.

2008q1

2008q3

2009q1

2009q3

2010q1

2010q3

2011q1

2011q3

2012q1

2012q30

2

4

6

8

10

12

United StatesEuro areaJapan

Source: OECD Main Economic Indicators.

10

Inflation is lowIn

flatio

n

-2

-1

0

1

2

3United States

Headline¹

Core²

2012m7

2012m8

2012m9

2012m10

2012m11

2012m12

2013m1

2013m2-2

-1

0

1

2

3Euro area

Headline¹ Core²

-2

-1

0

1

2

3

-2

-1

0

1

2

3 Japan

Headline¹ Core²

Note: 1. Headline is Headline CPI for the

United States and Japan, and Headline HICP for the euro area.

2. Core is CPI excluding food and energy for the United States and Japan, HICP excluding energy, food, alcohol and tobacco for the euro area.

Source: OECD Main Economic Indicators.

Consumer prices12-month percentage change

11

Policy action is needed to ensure a self-sustaining recovery

Polic

y re

com

men

datio

ns

• Demand in many countries still faces headwinds.

• Given limited fiscal space, monetary policy remains a key instrument for supporting demand.

• Low inflation gives room for monetary policy action.

• Fiscal consolidation remains necessary in most OECD countries.

• Stronger, more sustainable and fairer growth can be achieved through structural reform.

12

The United StatesRe

com

men

datio

ns: U

nite

d St

ates

• Consumption and housing have picked up, but policy rates should stay low until labour market conditions improve sufficiently and as long as inflation expectations remain well anchored.

• The point where the costs of further quantitative easing (QE) outweigh the benefits may be within sight, but skilful judgement will be required to gauge the speed at which asset purchases can be phased out.

• Fiscal policy should avoid disruptive outcomes in the near term, while agreement is needed on a plan to reduce the deficit over the medium term and address long-term cost pressures on health care and pensions.

13

JapanRe

com

men

datio

ns: J

apan

• The prospect of easier monetary policy has resulted in welcome yen depreciation and surging equity prices. Implementation will require more aggressive QE, with more asset purchases going to long-term government and corporate bonds. An expansionary stance should be maintained until inflation is durably around the 2% target.

• A credible plan to attain the government’s long-term fiscal targets is needed. Controlling expenditures is key, particularly for social security.

• Monetary, fiscal and structural policies must be applied in a mutually reinforcing way to tackle the high level of public debt while supporting growth.

14

The euro areaRe

com

men

datio

ns: t

he e

uro

area

• Monetary policy should be eased, given weak demand and below-target inflation. Policy rates are already low, but can be reduced further, and more specific forward guidance could be given.

• The euro area remains vulnerable to feedback loops between banking system fragility and public debt burdens. Rapid progress must be made on the construction of a fully fledged banking union.

• The Cypriot case, while exceptional, shows the importance of addressing banking crises directly while creating the right institutions at the euro area level to maintain banking system stability.

• Existing commitments to structural budgetary consolidation should be met, while allowing automatic stabilisers to operate fully. This implies that nominal deficit targets are likely to be missed.

15

The cost of credit still varies widelyin the euro area

Euro

are

a cr

edit

cost

s

2005m1

2005m5

2005m9

2006m1

2006m5

2006m9

2007m1

2007m5

2007m9

2008m1

2008m5

2008m9

2009m1

2009m5

2009m9

2010m1

2010m5

2010m9

2011m1

2011m5

2011m9

2012m1

2012m5

2012m9

2013m11.5

2.5

3.5

4.5

5.5

6.5

7.5

France Germany

Greece Ireland

Italy Portugal

Spain

Note: Cost of credit is defined as the interest rate on new loans to non-financial corporations (all maturities) with the exception of Greece, where it refers to new loans with a maturity of up to one year. Source: European Central Bank.

Bank loan rates for non-financial corporationsPer cent

16

The level and rise of public debt in the euro area as a whole are not out of line

with other major economies

Euro

are

a go

vern

men

t deb

t to

GD

P

General government debt to GDP Per cent

Note: For the euro area, Japan, and United Kingdom, the values from 2012 Q1 onwards are calculated using OECD estimates of gross debt and the actual value of GDP according to national accounts statistics.Source: OECD National Accounts database and OECD calculations.

2007q1

2007q3

2008q1

2008q3

2009q1

2009q3

2010q1

2010q3

2011q1

2011q3

2012q1

2012q320

40

60

80

100

120

140

160

180

200

220

240

20

40

60

80

100

120

140

160

180

United States (right scale)

Euro area (right scale)

Japan (left scale)

United Kingdom (right scale)

17

Euro area rebalancingEu

ro a

rea

reba

lanc

ing

• The underlying rebalancing of the economy is underway, although the process still has some way to go.

• Considerable progress has been made on reducing structural budget deficits, and in most countries the largest part of the fiscal adjustment required after the crisis has already been undertaken.

• Structural reforms, notably in Greece, Ireland, Italy, Portugal and Spain, provide a solid base for a recovery in competitiveness and an increase in employment when demand turns around.

• The short-term costs of these adjustments would be reduced by an improved supply of credit in debtor countries and structural reforms to rebalance activity and demand in surplus economies.

18

Competitiveness adjustments in the euro area are underway

Euro

are

a un

it la

bour

cos

ts

Unit labour costIndex, 1999 = 100

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 201290

100

110

120

130

140

150Core countries 1

Programme countries 1

France

Italy

Spain

Note: 1. Core countries are here defined as Germany, the Netherlands, Austria and Finland. Programme countries are Greece, Ireland and Portugal. 2. Economy-wide unit labour costs. 2012 incorporates estimates in Economic Outlook 92. Country groupings constructed as a chain-linked aggregates using nominal GDP weights.Source: OECD Quarterly National Accounts database and Economic Outlook 92 database.

19

Lower periphery imports have been the main adjustment factor so far

Euro

are

a cu

rren

t acc

ount

adj

ustm

ent

2008 2009 2010 2011 201280

85

90

95

100

105

110

115

120

Core 1

Import volumes

Export volumes

2008 2009 2010 2011 201280859095100105110115120

Periphery 2

Import volumes

Export volumes

Index, 2008=100

2008q1

2008q3

2009q1

2009q3

2010q1

2010q3

2011q1

2011q3

2012q1

2012q3-10

-6

-2

2

6

Current Account BalancePer cent of GDP

Core Periphery

Note: 1. The core is here taken as comprising

Austria, Finland, Germany and the Netherlands.

2. The periphery is here defined as Greece, Italy, Ireland, Portugal and Spain.

3. Current account balance is the sum of current account balances as a percentage of the combined GDP across the countries.

Source: OECD National Accounts database, Economic Outlook 92 database and OECD calculations.

Index, 2008=100

20

What is the near-term global economic outlook?

An interim assessment

Paris, 28th March 201311h00 Paris time

Pier Carlo PadoanOECD Deputy Secretary-General and Chief Economist