25.5.2011
By Simon Miller
Risk of inflation and unsettled fiscal situations could scupper the on-going global recovery according to the latest Economic Outlook from the Organisation for Economic Co-Operation and Development (OECD).
Despite the global recovery being “firmly under way”, the OECD warned that the possibility of further increases in oil and commodity prices - which could feed into core inflation; a stronger-than-projected slowdown in China; the unsettled fiscal situation in the United States and Japan; and renewed weakness in housing markets in many OECD countries were the biggest risks facing the positive outlook. In addition, financial vulnerabilities remained in the euro area, in spite of strong adjustment efforts underway in some countries.
“This is a delicate moment for the global economy, and the crisis is not over until our economies are creating enough jobs again,” said OECD secretary-general Angel Gurría. “There is also some concern that if downside risks reinforce each other, their cumulative impact could weaken the recovery significantly, possibly triggering stagflation in some advanced economies.”
The OECD said the top challenge facing countries continues to be dealing with widespread unemployment, which affects more than 50m people in the OECD area.
“Governments must ensure that employment services and training programmes actually match the unemployed to jobs. They should also rebalance employment protection towards temporary workers; consider reducing taxes on labour via targeted subsidies for low paid jobs; and promote work-sharing arrangements that can minimise employment losses during downturns,” said the organisation.
It added that in advanced economies structural reforms could play a greater in role in boosting growth as governments are forced to withdraw fiscal and monetary stimulus launched in reaction to the crisis.
However, despite the warning, the OECD believes the global recovery is firmly under way, albeit taking place at different speeds across countries and regions.
World gross domestic product (GDP) is projected to increase by 4.2% this year and by 4.6% in 2012. Across OECD countries GDP is projected to rise by 2.3% this year and by 2.8% in 2012, in line with the previous forecasts of November 2010.
In the US, activity is projected to rise by 2.6% this year and by a further 3.1% in 2012. Euro area growth is forecast at 2% this year and next, while in Japan, GDP is expected to contract by 0.9% in 2011 and expand by 2.2% in 2012.
The OECD said the recovery was becoming self-sustained, with trade and investment gradually replacing fiscal and monetary stimulus as the principal drivers of economic growth. Confidence is increasing, which could add further buoyancy to private sector activity,
However, fiscal consolidation goals were increasingly urgent for countries. Government debt is set to rise to close to 96% of GDP average in the euro area this year and to just above 100% of GDP in the OECD as a whole - about 30 percentage points above the pre-crisis level, according to the organisation.
“High public debt levels, which have been shown to have a negative impact on growth, must be stabilised and then reduced as soon as possible, especially if one considers the likely impact of ageing in the next few decades,” Gurría said
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