The Organization for Economic Cooperation and Development raised its growth forecasts for this year and next as emerging economies such as China outpace debt- burdened developed countries to drive the global expansion.
The economy of the OECD’s 30 members will grow 2.7 percent this year, more than the 1.9 percent predicted in November, the Paris-based group said today in a report. Including non-members such as China, the global economy will expand 4.6 percent this year and 4.5 percent in 2011, compared with an average of 3.7 percent during the decade through 2006.
The projections highlight the divergence in the global economy after it emerged last year from its worst slump in more than half a century. While the economies of China and India risk overheating, indebtedness may threaten expansion in the developed world, according to the OECD, which advises its members on policy.
“A first substantive risk is related to developments in sovereign debt markets,” OECD Chief Economist Pier Carlo Padoan wrote in the report. Elsewhere, “a boom-bust scenario cannot be ruled out, requiring a much stronger tightening of monetary policy” in some countries, including China and India, he said.
Debt Crisis
Europe’s sovereign-debt crisis, triggered by Greece, has raised investor concern that the economic recovery will fade and sent equity markets around the world tumbling. The MSCI World Index is down 8.7 percent this year, while the S&P 500 Index in the U.S. has shed 2.4 percent and the Euro Stoxx 50 Index has dropped 12.7 percent.
Still, the U.S. economy will grow 3.2 percent in 2010 and next year instead of the 2.5 percent predicted in November, and the euro region will advance 1.2 percent compared with the previous forecast of 0.9 percent, the OECD said. Japan’s economy will expand 3 percent instead of 1.8 percent.
Those rates contrast with a far faster pace of growth in emerging economies. China will expand more than 11 percent this year, India 8.3 percent and Brazil 6.5 percent, the OECD said. While India will grow 8.5 percent next year, China and Brazil’s expansion will slow to 9.7 percent and 5 percent respectively as monetary policy is tightened to prevent asset bubbles and to keep inflation in check, according to the report.
Chinese Trade
“As activity gathers momentum, global imbalances are beginning to widen again,” Padoan said. “Strong, sustainable and more balanced growth can be achieved through a combination of macro-economic, exchange-rate and structural policies.”
China’s efforts to stoke domestic demand have helped keep its trade surplus from returning to the record levels registered in 2006 and 2007, before the financial crisis, the OECD said.
U.S.-China talks set up primarily to head off bilateral disputes focused this week on threats to global stability, including Europe’s debt crisis. About 200 U.S. officials wrapped up meetings in Beijing two days ago as the euro’s decline to an eight-year low against the yen and a 4.7 percent plunge versus the won overshadowed sparring on trade and China’s control of its exchange rate.
The relative weakness of the euro region puts the onus on its policy makers to improve their long-term coordination after agreeing earlier this month on a support package worth almost $1 trillion to help debt-burdened countries such as Greece, Spain and Portugal, the OECD said.
The European effort, culminating in a finance ministers’ meeting in Brussels on May 9, was comparable with that made to shore up banks in Western countries in October 2008.
Lingering Instability
“The fact that the second set of actions has been taken 18 months after the first is a reminder that the period of significant financial instability that began in August 2007 is not yet over,” Padoan said. “Short-term policy responses are not without long-term consequences. Above all, rising indebtedness and widespread moral hazard will reduce room for policy action, if needed, in future.”
The OECD said the euro area needs to increase wage and price flexibility, change investment structures and consider raising retirement ages in order to help contain divergences between countries.
The organization urged the European Central Bank, which began buying government bonds for the first time this month, to remain accommodative. The ECB’s main policy rate has been held at 1 percent for more than a year and it should be kept there “until late 2010,” the OECD said.
German Recovery
It also urged the Frankfurt-based central bank to “provide a clear road map on the offsetting and the eventual unwinding of long-term asset holdings so as to anchor long-term inflation expectations, which in some cases have drifted up.”
In Germany, the euro region’s biggest economy, the recovery remains intact and growth should “pick up strongly” as global trade improves and companies boost investment, according to the report. Germany will expand 1.9 percent this year and 2.1 percent in 2011, it said.
France will expand 1.7 percent and 2.1 percent this year and next, while the U.K., which neighbors the euro area, will grow 1.3 percent and 2.5 percent.
Britain, where David Cameron replaced Gordon Brown as prime minister May 12, is trailing the two other biggest economies in Europe because of “high inflation and the lingering effects from the credit crunch,” the OECD said. Cameron pledged to speed up measures to reduce the U.K.’s record budget deficit as he outlined yesterday his government’s legislative plan.
U.K. Rates
“While fiscal policy supported activity in 2009, it will be a drag on activity from 2010 onwards,” the OECD said.
Faster budget tightening may give the Bank of England room to delay rate increases, though the central bank should consider raising interest rates before yearend as inflation expectations build, according to the report.
Similarly in Canada, where the economy is expected to grow 3.6 percent this year, the central bank should start raising its main rate “without delay,” the OECD said. The Bank of Canada’s benchmark rate is currently set at a record low 0.25 percent.
The OECD’s forecast for euro-area growth next year barely budged, rising to 1.8 percent from 1.7 percent.
Greece is the only OECD member expected to be in recession next year as budget cuts push the economy into a 2.5 percent contraction. Portugal and Spain are forecast as the second and third-worst performers, expanding 0.8 percent and 0.9 percent respectively in 2011, the OECD said.
Japan’s 2011 growth forecast was maintained at 2 percent, although risks “are linked to fiscal policy,” the OECD said. With an eye to Europe’s crisis, Japan should trim its budget gap or else public debt will reach 205 percent of output next year, according to the report.
By Mark Deen
Tags: Debt, economy, financial, financial system, Global Economy, interest rates, monetary, stock market, us economy, us stocks
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