Wednesday, May 26, 2010

OECD lifts 2010 growth forecasts for rich economies but sees no end to era of instability

Economic recovery in the world’s richest countries is accelerating thanks to a “substantial” rebound in trade and growth in Asia, but austerity measures are needed to reduce government deficits, a leading agency said Wednesday.


The Organization for Economic Co-operation and Development, a watchdog for 31 of the world’s most developed countries, said the current environment is “relatively auspicious” but faced with serious risks.

Those include Europe’s sovereign debt crisis and a possible boom-bust scenario in emerging markets such as Brazil, India and China – which have been growing much faster than the more developed OECD economies.

“The period of significant financial instability that began in August 2007 is not yet over,” the OECD warned in its latest biannual Economic Outlook.

The Paris-based group also raised its forecasts for economic growth in its member countries – which include Canada, the United States, Japan, Germany and the United Kingdom – to 2.7 per cent this year, up from its forecast of 1.9 per cent last November.

Canada’s growth this year is expected to be ahead of most other OECD countries, with real gross domestic product to be 3.6 per cent over the weak performance of 2009.

The OECD lifted its forecasts for Japan, the United States and the eurozone countries, but Japan and the U.S. are still expected to outpace Europe, the report said. Japan’s growth is estimated at three per cent in 2010 and the U.S. GDP is expected to rise by 3.2 per cent.

“The outlook has really improved in this short period” since the OECD’s last forecast, Secretary-General Angel Gurria said in a news conference at the organization’s headquarters.

But the OECD chief urged member countries to pursue “fiscal consolidation” – reducing their deficits through spending cuts and a clampdown on tax evasion – which he said was “imperative” to make the OECD’s positive growth outlook a reality.

The OECD publishes its economic outlook twice a year, although it updated some 2010 forecasts in an interim assessment published in April.

Europe’s response to its sovereign debt crisis – the latest chapter in the global financial and economic turmoil that began three years ago – has been “prompt and massive,” the OECD said, but has failed to settle the currency bloc’s “underlying weaknesses.”

The OECD called for “bolder measures” – up to and including an effective fiscal union – among eurozone countries in order to “dissipate doubts about the long-term viability of the monetary union.”

“Bolder measures need to be taken to ensure fiscal discipline, along a continuum that ranges from stronger surveillance and more effective sanctions for noncompliance, to external auditing of national budgets all the way to de facto fiscal union,” the OECD said.

Gurria stressed that the current turbulence in Europe is part of the same crisis that began in the U.S. in 2007. “This is the same crisis, it’s a continuum,” Gurria said, adding that the next challenge after slashing the massive debt loads countries took on save the banking industry and combat recession is unemployment.

Unemployment in the OECD area is forecast to peak at 8.5 per cent by the middle of this year, Gurria said. It will remain stuck at over 8 per cent next year however, as companies in Japan and Europe are expected to increase working hours of employees rather than hire new workers.

The U.S. economy has been boosted by stimulus measures, improving financial conditions, demand from the fast-growing non-OECD economies of Asia – especially China – and the stabilization of the housing market.

The employment outlook in the United States also looks better than in Europe and Japan. The OECD predicted that unemployment will come down to 8.9 per cent next year from a high of 9.7 per cent this year, as unlike their counterparts in Europe and Japan, U.S. businesses shed large numbers of employees in the downturn and should “rehire relatively strongly” in the upturn, the OECD said.

The OECD predicts the U.S. economy will expand at a rate of 3.2 per cent in 2010, up from a November forecast of 2.5 per cent.

In Europe, the economies of the 16 countries sharing the euro are now expected to grow by 1.2 per cent this year compared to a November forecast of 0.9 per cent.

Unemployment will peak at 10.1 per cent this year in the eurozone and stay stubbornly at that level in 2011, sapping the strength of the recovery, the OECD said.

The recent weakness in the euro versus the dollar will benefit European growth, OECD chief economist Pier Carlo Padoan said. “I would not be concerned if we see a further decline in the euro,” Padoan said, “This would be a welcome addition to external demand for the euro area.”

Padoan added that “the global economy needs some rebalancing in exchange rates,” saying that the euro has been overvalued versus the dollar and China’s currency undervalued.

Japan’s economy will grow by three per cent this year compared with the November forecast of 1.8 per cent, the report said.

– By Greg Keller, The Associated Press, with a contribution from The Canadian Press in Toronto