A moderate recovery is underway in the major advanced economies, according to the OECD’s latest Interim Economic Assessment. Growth is proceeding at encouraging rates in North America, Japan and the UK. The euro area as a whole is out of recession, although output remains weak in a number of countries.
Growth has slowed in some of the large emerging economies, however. One factor has been a rise in global bond yields – triggered in part by an expected scaling back of the US Federal Reserve’s quantitative easing – which has fuelled market instability and capital outflows in a number of major emerging economies, such as India and Indonesia.
Since they now account for a large share of the world economy, the slowdown in the emerging economies points to sluggish near-term growth globally, despite the pick-up in the advanced economies.
Economic growth in the major advanced economies is expected to continue at a similar pace in the second half of 2013 as in the second quarter. In the three largest OECD economies, the US, Japan and Germany, activity is expected to expand by about 2 ½ per cent annualised in the third andfourth quarters. France is forecast to grow by about 1½ per cent annualised in the second half of the year, while in Italy growth is expected to remain mildly negative.
GDP growth in China is forecast to pick up to about 8% by the final quarter, after a slowdown in the first half of 2013. Even that would represent a slower rate than in recent years, however.
Presenting the Assessment in Paris, OECD Deputy Chief Economist Jorgen Elmeskov said: “The gradual pick-up in momentum in the advanced economies is encouraging but a sustainable recovery is not yet firmly established. Major risks remain. The euro area is still vulnerable to renewed financial markets, banking and sovereign debt tensions. High levels of debt in some emerging markets have increased their vulnerability to financial shocks. And a renewal of brinksmanship over fiscal policy in the US could weaken confidence and trigger new episodes of financial turmoil. ”
He added: “Continued support for demand is still needed to make sure recovery takes hold, and it remains vital that this be complemented by structural reforms to boost growth, rebalance the global economy and avoid a ratcheting-up of structural unemployment.”
Tackling high unemployment is crucial and must be a key focus of government action, says the OECD. Unemployment rates are around 12 per cent in the euro area and 7½ per cent in the United States, far above pre-crisis levels, and to avoid high rates getting entrenched even as a recovery takes hold governments must implement effective training and activation policies, backed by support for stronger demand. Reforming tax-benefit systems should improve work incentives while targeted measures are needed for vulnerable groups such as jobless young people outside the training and education system.
The Interim Economic Assessment says public finances have been improving in most advanced economies, with the exception of Japan, but that fiscal consolidation policies must continue. Such policies need to be better designed, however, to protect the most vulnerable in society, to build public support for necessary structural reforms and to prioritise spending to help get people back to work.