A moderate expansion is underway in most major advanced and emerging economies, but growth remains weak in the Eurozone, which runs the risk of prolonged stagnation if further steps are not taken to boost demand, according to the OECD’s gloomy Interim Economic Assessment, which cuts its forecasts for all big economies except India.
The think-tank for 34 mainly developed countries including Ireland said that recent global growth of just over 3% a year was “well below the pre-crisis pace” and the expansion of world trade ”sub-par."
While the global recovery continues at a moderate rate, the outlook is uneven across regions. Growth will be strong enough to push unemployment down further in the United States, the United Kingdom and Canada. In Japan, where unemployment has already declined to low levels, the economy will grow broadly in line with its potential. China is expected to continue an orderly adjustment to still high but more sustainable growth rates. Growth in India is projected to pick up with Brazil growing by just 0.3% compared with the 1.8% that was forecast in May.
Presenting the Interim Economic Assessment [pdf] in Paris, Rintaro Tamaki, OECD deputy secretary-general and acting chief economist, said: “The global economy is expanding unevenly, and at only a moderate rate. Trade growth therefore remains sluggish and labour market conditions in the main advanced economies are improving only gradually, with far too many people still unable to find good jobs worldwide. The continued failure to generate strong, balanced and inclusive growth underlines the urgency of undertaking ambitious reforms.”
The OECD projects that the US will grow by 2.1% this year and by 3.1% in 2015, while the UK is projected to grow at 3.1% in 2014 and 2.8% in 2015. Canadian growth is projected at 2.3% this year and 2.7% in 2015.
Under the continuing influence of monetary stimulation, Japan is projected to grow by 0.9% in 2014 and 1.1% in 2015.
The Eurozone is projected to grow at a 0.8% rate in 2014 and a 1.1% pace in 2015. Growth prospects differ widely among the major Eurozone economies. Germany is forecast to grow by 1.5% in both 2014 and 2015, France by 0.4% in 2014 and 1% in 2015, while Italy will see a -0.4% drop in 2014 and a gain of just 0.1% in 2015.
Given the low-growth outlook and the risk that demand could be further sapped if inflation remains near zero, or even turns negative, the OECD recommends more monetary support for the Eurozone. The OECD said recent actions by the European Central Bank are welcome, but further measures, including quantitative easing, are warranted. Given the weakness of demand, European countries should also use the full degree of flexibility available within the EU’s fiscal rules.
While emerging economies as a group will continue to grow much faster than the advanced economies, the forecasts are similarly uneven across countries. China is expected to grow by 7.4% in 2014 and 7.3% in 2015. India will grow by 5.7% in 2014 and 5.9% in 2015. Brazil will grow by only 0.3% this year, having fallen into recession in the first half of the year, and 1.4% next.
With countries facing such diverging outlooks, macroeconomic policy needs are becoming increasingly diverse. “The Eurozone needs more vigorous monetary stimulus, while the US and the UK are rightly winding down their unconventional monetary easing,” Tamaki said. “Japan still needs more quantitative easing to secure a lasting break with deflation, but must make more progress on fiscal consolidation than most other countries.”
The economists say that another sign that labour market conditions have yet to tighten significantly is that real wage growth remains very weak in many countries. While this helped contain job losses during the crisis and was necessary in some euro area countries in order to regain competitiveness, it is now holding back a stronger recovery in consumer spending.
The Paris based Organisation for Economic Co-operation and Development is a think-tank for 34 mainly developed countries. OECD member countries are: Australia, Austria, Belgium, Canada, Chile, the Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Israel, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Poland, Portugal, the Slovak Republic, Slovenia, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States. The European Commission takes part in the work of the OECD.