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So, how’s it going?

October 29, 2012

OECD prepares for brainstorm

It’s a big day here today, with French President François Hollande and senior ministers coming to find out what the heads of the OECD, World Bank, IMF, WTO and ILO have to say about the global economic outlook as well as the European and French economies. They’re discussing policies needed to return to growth, redress global imbalances, improve competitiveness and alleviate the social impact of the crisis.

We talked about the OECD’s views here in an article called “Doom and gloom” on the May interim global economic outlook. The main worry was that the euro area crisis is dragging down the rest of the world economy through its impacts on trade and business and consumer confidence. The World Bank agrees. Their Global Economic Prospects says that “resurgence of tensions in the Euro Area is a reminder that the after effects of the 2008/09 crisis have not yet played out fully. Financial market uncertainty and fiscal consolidation associated with the high deficits and debt levels of high-income countries are likely to be recurring sources of volatility for the foreseeable future as it will take years of concerted political and economic effort before debt to GDP levels of the United States, Japan and many Euro Area countries are brought down to sustainable levels.”

The World Bank’s sister organisation, the IMF supports its sibling, and the OECD. The Global Financial Stability Report (GFSR) says that “risks to financial stability have increased since the April 2012 GFSR, as confidence in the global financial system has become very fragile. Although significant new efforts by European policymakers have allayed investors’ biggest fears, the euro area crisis remains the principal source of concern.”

Austerity is among these efforts, but the OECD warned that although this is a medium-term policy designed to help public finances, it acts as a drag on short-term economic activity, and can even start 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 ILO calls this the “austerity trap” in the latest World of Work Report, and outlines a similar vicious circle to the one the OECD described: “Austerity has, in fact, resulted in weaker economic growth, increased volatility and a worsening of banks’ balance sheets leading to a further contraction of credit, lower investment and, consequently, more job losses. Ironically, this has adversely affected government budgets, thus increasing the demands for further austerity.”

The ILO estimates that there is still a deficit of around 50 million jobs compared to the pre-crisis situation, and “It is unlikely that the world economy will grow at a sufficient pace over the next couple of years to both close the existing jobs deficit and provide employment for the over 80 million people expected to enter the labour market during this period.”

As you’ve no doubt noticed, there’s a general air of pessimism about these reports, and even the efforts that have been made to address the issues that caused the crisis in the first place don’t generate much enthusiasm. Financial sector reform for instance, leaves a lot to be desired according to the IMF, because although there has been some progress over the past five years, financial systems have not come much closer to being more transparent, less complex, and less leveraged. “They are still overly complex, with strong domestic interbank linkages, and concentrated, with the too-important-to-fail issues unresolved.”

Developing and emerging economies did comparatively better than the more developed economies during the crisis, but even there are worrying signs, with the World bank warning that in a new crisis no developing country would be spared, particularly those with strong reliance on worker remittances, tourism, commodities or those with high levels of short-term debt or medium-term financing requirements. Even without a full-blown crisis, elevated fiscal deficits and debts in high-income countries and their very loose monetary policies mean that the external environment for developing economies is likely to remain characterized by volatile capital flows and heightened investor uncertainty.

But let’s end of a positive note. The WTO’s figures reveal that world merchandise exports increased by 5% in 2011 in volume terms. The United States remains the world’s biggest trader (in value terms), with imports and exports totalling $3,746 billion in 2011. China and Germany rank second and third respectively. Exports of commercial services grew by 11% in value terms. The United States is the world’s largest trader, with $976 billion of services trade in 2011.

See you next year, if President Hollande’s suggestion to make this an annual event is adopted.

Useful links

OECD work on the economy

OECD work on employment

OECD work on finance

OECD work on trade

4 Responses
  1. Sean Byrne permalink
    October 29, 2012

    Dear Dr. Love,
    I appreciate your hard work and that of the OECD staff, particularly in terms of OECD Insights. I find them quite informative, as one can’t be a specialist in all areas. This is apart from the great research which has been very helpful for my own research. I have to believe that you have readership, which is all of socioeconomic and age backgrounds, and catches on to the pessimism very quickly, i.e. the “Doom and Gloom”(albeit informative). I recommend the “OECD Insights” to every one of my classes, so it is great to see you folks, illustrating that there are viable solutions out there, and more importantly, a sense of hope for the future generations. Thanks again for the great article. Sean Byrne

  2. November 5, 2012

    Read with interest! I have been around a long time, this allows me to look back further than most and make comparisons with earlier recessions.
    Each time the UK has had a downturn in its economy, it has struggled more, each time, to reach a recovery.
    The answer is quite obvious; each time there was less and less of a manufacturing base on which to support a return to growth.
    Time was, less than 100 years ago, when almost all the world’s commodities were produced here. Then of course we were prosperous.
    The decline in the UK’s manufacture, as with other EU countries, has simply gone too far. Some rebuilding of this, obviously not to the levels mentioned previously, but partially, is needed to redress some of the imbalance with emerging economies. If we and the EU cannot afford to trade at a sustainable level, then of course, the development of these economies will not be sustained either.
    Th difficulty with this solution is that history is a hard teacher and not everyone wants to learn.

  3. Rick Boychuk permalink
    November 6, 2012

    Patrick,

    I’m seeking the source of the OECD warning you cited: ….that although this is a medium-term policy designed to help public finances, it acts as a drag on short-term economic activity, and can even start 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…

    • Patrick Love permalink*
      November 7, 2012

      Rick,

      This is based on our interim economic outlook published on 6 September. Pier Carlo Padoan, OECD Chief Economist and Deputy Secretary General says:
      “Fiscal consolidation, while necessary from a medium-term perspective, is acting as a drag on short-term economic activity. An adverse feedback loop may be at work in some countries, with activity turning out weaker than assumed in budgets and thereby prompting overruns and further consolidation needs.” (page 12) You can find a pdf of the outlook here:

      http://www.oecdtokyo2.org/pdf/theme_pdf/macroeconomics_pdf/20120906InterimAssessment.pdf

      Patrick

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