Doom and gloom, continued

A non-fiscal cliff earlier today

After Monday’s post about how bad things could get, I thought an article on the OECD’s interim global economic outlook released today would cheer you up. It won’t. English prepositions being what they are, “cheer you down” doesn’t exist, but if it did, down you would be cheered. A quick glance at the early reactions from the international media gives you the flavour, even if you don’t speak the languages: Rezession, récession, recessione. The OECD projects that the euro area’s three largest economies – Germany, France and Italy – will shrink at an annualised rate of 1 percent on average during the third quarter of this year and at 0.7 percent in the fourth.

The euro area crisis is dragging down the rest of the world economy through its impacts on trade and business and consumer confidence. The outlook thinks that “durable” changes are taking place in the geographical composition of global imbalances, with the euro area trade surplus rising on soft domestic demand and fiscal consolidation. China’s exports to the euro area are being hit hard. This may affect China’s ability to invest in the US in the longer term, although that aspect is beyond the scope of an interim outlook. In the US itself, an increasing non-oil deficit is offset by an improving oil balance. This is another area where longer-term developments will be interesting. Oil production from deepwater sites and unconventional sources such as oil sands or the Arctic will grow, and most of the potential fields are outside the Middle East. The Japanese surplus is falling because of rising energy imports and sluggish exports. Business investment is holding up, but mainly due to post-disaster reconstruction.

Could it get even worse? Yes it could: “Risks to the outlook remain significant”. Apart from the euro area crisis, the report mentions the US heading for a “fiscal cliff”. Even if you’ve never heard that expression, you probably suspect that it’s the kind of cliff you fall, jump or are pushed off. The outlook explains that current legislation implies an extremely sharp fiscal tightening in 2013 (the fiscal cliff) that would probably push the US economy into recession. It then urges the political parties to agree on detailed medium-term consolidation plans to avoid this. Perhaps one of our American readers could tell us what the chances are of the parties doing this.

Fiscal policy poses problems elsewhere too. Rigour, austerity, tightening or whatever it’s called is a medium-term policy, but it’s acting as a drag on short-term economic activity. Some countries may actually be caught in a negative feedback loop whereby activity is weaker than expected when planning the budget, so less tax comes in and there is overspending and then the need for more consolidation, which acts as a drag…

The outlook suggests actions to address feedback loops that undermine the euro’s stability. Speculation that Greece or others might leave the euro are pushing up sovereign bond yields, making it more expensive for some governments to borrow, further reinforcing fears of a break-up. The OECD argues that exit fears could be soothed if the ECB intervened in bond markets to keep spreads (the different interest rates paid on sovereign debt of one country compared to another) within ranges justified by the fundamental economic conditions.

And in a move that will no doubt enrage euro sceptics, the Organisation also calls for further progress towards banking union to increase the availability of public funds to recapitalise banks, along with full recognition of non-performing loans enforced by common supervision.

This just in. Mario Draghi, the European Central Bank’s president has announced a plan whereby the ECB will buy unlimited quantities of government bonds to help countries facing high interest rates. Critics say it will discourage governments’ efforts to balance the books and that it would fuel inflation. That’s not the opinion of OECD Secretary-General Angel Gurría who backed such a move a month ago. “Speculators will lose their bet against the euro, because the ECB will then pull out all the stops,” he told the Neue Osnabruecker Zeitung, adding that he saw no risk of inflation in the short term.

So far, the announcement has boosted stock markets and helped  Italian and Spanish bonds, so maybe the gloom will not become doom. Watch this space.

Useful links

OECD work on the economic outlook, analysis and forecasts

OECD Sovereign Borrowing Outlook

Patrick Love

4 comments to “Doom and gloom, continued”

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  1. Jakob Fix - 06/09/2012 Reply

    Thanks ever so much for translating the economy speak for the rest of us! And despite the gloomy contents I had a laugh, in particular “that cliff earlier today”… That’s me cheered down.

  2. JRHulls - 06/09/2012 Reply

    Marlene Deitrich is often credited with the quote that “Things are often darkest just before it goes pitch black.” You mention one of the most critical problems inasmuch as austerity can cut tax revenues while increasing the demand for “safety net” expenditures. This effect shows up plainly in the recovery from the crisis in the US, where the costs of the additional unemployment are a major contributor to the deficit. Here‘s the Congressional Budget Office view as of January 2011. Note that the assumptions are that the Bush administration’s tax cuts will expire and current laws stay in place, and pretty much disregards the “cliff”. Not a happy picture.

  3. [email protected] - 07/09/2012 Reply

    How about some lovely Hobbesian rumination to bright our Fridays?

    “Whatsoever therefore is consequent to a time of war, where every man is enemy to every man, the same consequent to the time wherein men live without other security than what their own strength and their own invention shall furnish them withal. In such condition there is no place for industry, because the fruit thereof is uncertain: and consequently no culture of the earth; no navigation, nor use of the commodities that may be imported by sea; no commodious building; no instruments of moving and removing such things as require much force; no knowledge of the face of the earth; no account of time; no arts; no letters; no society; and which is worst of all, continual fear, and danger of violent death; and the life of man, solitary, poor, nasty, brutish, and short.”

  4. Philip J Hodkinson - 10/09/2012 Reply

    Ha Ha ! He is of course correct, but then continual fear, danger of death,solitaryness, poor nasty, brutish and short, refers to the circumstances of a large proportion of mankind today. So. No change there then.
    History tells us that massive change in world order, comes about surprisingly swiftly.
    But then we never learn from history, do we?.

    More seriously. The politics of total austerity never work, they are self defeating as has been noted. Neither will spending the way to prosperity work either.
    These are the policies of vested interest rather than public interest, that have lead to the Boom, Bust eras of the last 80 years.
    A sustainable (sorry) balancing act between the two is the way forward. Albeit a somewhat reduced affluence of the old guard, as the new develops into hopefully a new era of a true global market, for the benefit of all.

    (Hopefully uplifting for the new week)

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