1

The OECD Global Economic Outlook

Nigel Pain

OECD Economics Department

Edinburgh, 11 July 2013 NCSL Symposium for Legislative Leaders

2

Presentation structure O

verv

iew

• Current situation and prospects.

• Global economic developments

• Key forces acting on the major economies

• Prospects for 2013-14.

• Key policy requirements.

• Tackling the euro area crisis.

• Long-run fiscal needs.

3

Financial crisis: deep recession, slow recovery

Rec

essi

on

s an

d r

eco

veri

es

4

There are divergent trends among the major OECD economies

Rec

essi

on

s an

d r

eco

veri

es

5

Growth outcomes in the major emerging markets have also diverged

Rec

essi

on

s an

d r

eco

veri

es

6

The recession has deepened in some parts of the euro area

Rec

essi

on

s an

d r

eco

veri

es

7

The global recovery is proceeding slowly Th

e re

cove

ry in

th

e G

-20

8

Global trade growth remains very weak G

lob

al t

rad

e gr

ow

th

The gradual accumulation of trade restrictions in the G20 in recent years remains a concern.

9

Growth has slowed sharply in the emerging market economies

Slo

wd

ow

n in

EM

E gr

ow

th

-1

1

3

5

7

9

11

China India Brazil Russia South Africa

Year-on-year real GDP growth, per cent

10

Key business surveys (PMIs) provide mixed signals across economies

Bu

sin

ess

surv

eys

Source: Markit. Composite PMI series, seasonally adjusted.

11

OECD financial conditions are improving Fi

nan

cial

co

nd

itio

ns

The FCI index weights together a large number of financial variables (asset prices, interest rates, credit conditions, exchange rate). A unit change in the FCI changes the level of GDP by 1% after 6 quarters.

12

Activity in Japan supported by recent financial market changes

Fin

anci

al c

on

dit

ion

s: J

apan

13

The euro area economy is held back by a very weak banking sector

Ban

kin

g se

cto

r

Source: ECB, national central banks

14

Credit conditions and credit growth also differ markedly across economies

Note: Euro area countries shown in yellow, others in red. 1. Interest rate 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. For the United States and the United Kingdom, interest rate on outstanding loans. 2. Year-on-year percentage change in the three months to February 2013. Source: Economic Outlook May 2013 press conference presentation.

Growth of credit to the private sector2

-12

-10

-8

-6

-4

-2

0

2

4

-12

-10

-8

-6

-4

-2

0

2

4

% %

Cost of credit1

0

1

2

3

4

5

6

7

0

1

2

3

4

5

6

7 % %

15

Household debt deleveraging has only taken place in a few countries

The

reco

very

in t

he

G-2

0

Change in ratio household gross debt – income ratio between 2007 and 2012 (% pts)

Source: May 2013 OECD Economic Outlook

16

Cross-country housing market developments continue to diverge

Fin

anci

al c

on

dit

ion

s: h

ou

se p

rice

s

Source: OECD House Price Database.

US house price-rent ratio now back to long-term average.

17

Fiscal consolidation is damping growth, but is generally expected to ease off in 2014

Fisc

al c

on

solid

atio

n

General government data. The fiscal multiplier is likely to be close to unity, especially as simultaneous consolidation across OECD.

18

The Global Outlook (OECD, May 2013)

Source: OECD Economic Outlook No. 93.

Eco

no

mic

pro

spec

ts

2011 2012

United States 1.8 2.2

Japan -0.6 2.0

Euro area 1.5 -0.5

China 9.3 7.8

Brazil 2.7 0.9

India 7.6 3.8

Global 3.7 3.0

World Trade growth 6.1 2.7

Annual GDP growth (calendar year, per cent)

2013 2014

1.9 2.8

1.6 1.4

-0.6 1.1

7.8 8.4

2.9 3.5

5.3 6.4

3.1 4.0

3.6 5.8

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The US Outlook (OECD, May 2013)

Source: OECD Economic Outlook No. 92.

US

eco

no

mic

pro

spec

ts

2011 2012

GDP 1.8 2.2

Household consumption 2.5 1.9

Housing investment -1.4 12.1

Employment 1.0 1.6

Unemployment rate (Q4) 8.7 7.8 General govt. budget

balance (% GDP) -10.2 -8.7 Current account balance

(% of GDP) -3.1 -3.0

10 year bond rates (% pt) 3.8 1.7

Gen. Govt. debt (% GDP) 102.3 106.3

Calendar year growth unless stated (%)

2013 2014

1.9 2.8

2.1 2.7

14.7 16.1

1.3 2.0

7.4 6.7

-5.4 -5.3

-3.1 -3.3

2.0 2.7

109.1 110.4

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Structural factors, institutions & policies are clearly influencing economic performance

Eco

no

mic

dev

elo

pm

ents

Economic outcomes over 2011 to 2013

USA Euro area UK

Average annual GDP growth (%) 2.0 0.1 0.7

Cumulative fiscal consolidation (% of GDP) 4.6 4.2 2.5

Average annual jobs growth (%) 1.2 -0.5 0.9

Average annual inflation (PCE, %) 1.8 1.5 3.2

All data taken from the May 2013 OECD Economic Outlook. 2013 data are OECD projections. Estimates of fiscal consolidation are based on the change in the underlying primary budget balance between 2010 and 2013. PCE refers to the private consumption deflator which is comparable across countries.

21

Labour market conditions are diverging Th

e o

utl

oo

k: u

nem

plo

ymen

t

Source: May 2013 OECD Economic Outlook

22

Underlying inflation to remain moderate

The

ou

tlo

ok:

Infl

atio

n

Note: United States - deflator of personal consumption expenditures (PCE) excluding food and energy; Euro area - harmonised index of consumer prices (HICP) excluding food, energy, tobacco and alcohol; Japan - consumer price index (CPI) excluding food and energy and consumption tax. Source: OECD Economic Outlook May 2013.

Core inflation, 4-quarter percentage change

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Global imbalances remain –structural reforms in all economies, and fiscal consolidation can help.

The

ou

tlo

ok:

glo

bal

imb

alan

ces

Source: May 2013 OECD Economic Outlook.

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Key policy requirements K

ey p

olic

y re

qu

irem

ents

• Maintain accommodative monetary policies.

• QE tapering likely to start in the US. Policy rate increase not merited before 2015 given unemployment projections.

• Further easing merited in euro area (inflation well below target).

• Continue fiscal consolidation, based on structural not headline budget objectives, in most of OECD.

• Composition should be growth/equity friendly.

• Clear and credible medium-term plans needed in some economies, especially Japan and at US Federal level.

• Continue structural reform efforts to boost growth and improve labour market outcomes.

• Strengthen macro-prudential policies & financial reforms.

• Maintain open markets for global trade.

• Maintain progress in tackling euro area crisis.

25

Risks to the outlook K

ey r

isks

Another leg to the euro area crisis. Very weak economic activity and persistent unemployment could prolong stagnation.

Potential financial market instability in the run-up to the eventual exit from unconventional monetary policy

Remaining fiscal policy risks, e.g. in relation to the impact of poorly targeted budgetary sequestration in the United States and unsustainable public finances in Japan

Potential growth rates turning out, post-crisis, to be lower than we think (long-run higher unemployment).

26

Signals of the imminent start to tapering of Fed’s QE purchases have unsettled markets

Rec

ent

dev

elo

pm

ents

US 10-year government bond yields (%)

1.5

1.7

1.9

2.1

2.3

2.5

2.7

2.9

1.5

1.7

1.9

2.1

2.3

2.5

2.7

2.9 Minimum value in 2013 Maximum value in 2013

This has led to significant re-pricing of financial assets worldwide, which will damp the momentum of the recovery. (ECB and Bank of England actions on July 4 attempted to calm markets.) US 30-yr mortgage rates up by 1%pt, junk bond rates up by 2%pt.

27

Partial price correction in equity markets R

ecen

t d

evel

op

men

ts

Emerging market growth forecast by private institutions revised down by 0.3 percentage points on average since nid-May.

28

Tackling the euro area crisis Ta

cklin

g th

e eu

ro a

rea

cris

is

• Continue progress in tackling the imbalances that built up prior to the crisis.

• Closer surveillance and co-ordination of policy choices.

• New “six-pack”and “two-pack”procedures.

• Is“contracturalisation” of policy commitments possible?

• Boosting growth at EU level – the Single Market, global trade initiatives.

• Continue efforts to block adverse “feedback loops”

• Between banks and governments.

• Between exit risk and government bond yields.

• Between bond yields and debt sustainability.

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Tackling the euro area crisis (2) Ta

cklin

g th

e eu

ro a

rea

cris

is

• Good progress has been made.

• Rebalancing is well under way with correction of cost competitiveness and elimination of current account deficits in

the weakest economies.

• Area-wide government debt is nearly stabilised, and much of the necessary fiscal consolidation has been implemented.

• Fiscal compact should ensure longer-run sustainability.

• Greater monitoring of structural policy implementation.

• ECB “whatever it takes” announcement has damped exit risks (though issues remain about the use of OMT if needed).

• The key issue remaining is the weakness of the banking sector.

30

Unit labour costs are becoming more closely aligned in many countries

Euro

are

a re

bal

anci

ng

Further adjustment needed to help periphery economies gain competitiveness against lower cost competitors (Central & Eastern Europe, Asia).

Unit labour costs in the euro area (1998=100)

31

Key structural reforms are underway St

ruct

ura

l ref

orm

s

• The OECD identifies key structural reform priorities in its annual Going for Growth publication.

• Responsiveness to reform priorities has risen since start of the crisis.

• Responsiveness highest in euro area external deficit economies.

32

Stopping the feedback between national banks and governments is key

Tack

ling

the

euro

are

a cr

isis

• Ultimately, a full banking union is required:

• Single supervisory mechanism (SSM), single resolution mechanism (SRM) and common fiscal backstop.

• SSM currently planned for large banks in 2014.

• Issues of supervision small banks, and safeguarding rights of non-euro area EU countries.

• SRM legislative proposals in 2013.

• Issue of who pays – creditors, banks (pre-funded schemes) or taxpayers.

• Once SSM in place, funds from ESM can be used to recapitalise banks directly

33

Recent progress towards a banking union in the euro area

Euro

are

a b

anki

ng

un

ion

Two agreements in June: to establish principles for the use of the ESM to recapitalise banks and set EU rules for bank resolution.

In some respects a positive step, but…

Not clear that enough has been done to sever the links between weak banks and stressed sovereigns:

• 60 billion euro ceiling on ESM financing

• Any ESM financing would not begin before mid-2014

• National governments have to contribute first before ESM financing can be envisaged

• Bail-in of some creditors (not insured deposits).

• Bank resolution remains national, maintaining incentives for regulatory forbearance

34

In medium-term more capital is required across European banking system

Tack

ling

the

euro

are

a cr

isis

Indicative estimates of additional capital required over Sep-2012 levels to bring core Tier 1 capital to benchmark of 5% of (unweighted) total assets [% of GDP].

Note: Based on consolidated balance sheets as of September 2012, prepared on an IFRS basis. Using a bottom-up approach to estimate additional capital for each bank. The total capital shortage is around EUR 400 billion. The 5% benchmark equity ratio is based on the maximum leverage of 20-times (see Blundell-Wignall and Atkinson, 2012). Source: OECD Economic Outlook 92.

35

Medium-term fiscal consolidation needs vary across countries

Lon

g-te

rm f

isca

l ch

alle

nge

s

Source: OECD May 2013 Economic Outlook long-term database.

36

Structural reforms to boost employment can also improve fiscal outcomes

Stru

ctu

ral r

efo

rms

Effect of 1% higher potential employment on the primary budget balance

37

Summary

• A multi-speed global recovery continues.

• Large policy challenges remain in many countries.

• New uncertainties about emerging markets.