OECD Economic Outlook: Global economy strengthening but significant risks remain

The global economy will strengthen over the coming two years, but urgent action is still required to further reduce unemployment and address other legacies from the crisis, according to the OECD’s latest Economic Outlook launched at this morning at the Ministerial Council Meeting and Forum in Paris.

Among the major advanced economies, recovery is best established in the United States, which is projected to grow by 2.6% in 2014 and 3.5% in 2015. The euro area will see a return of positive growth after three years of contraction: 1.2% in 2014 and 1.7% in 2015. In Japan, growth will be dented by the launch of much-needed fiscal consolidation measures, and is expected to hover at 1.2% in 2014 and 2015.

The BRIICS (Brazil, China, India, Indonesia, Russia and South Africa) are projected to see GDP growth of 5.3% this year on average and 5.7% in 2015. China will again have the fastest growth among these countries, with rates just below 7.5% in 2014 and 2015.

The Outlook draws attention to a range of positive developments as well as significant downside risks. Investment and trade are both showing signs of picking up, but growth will remain moderate by past standards. Financial conditions are improving in the advanced economies, but tighter credit and supply side bottlenecks are damping growth in emerging economies.

Unemployment has begun falling from the historic levels seen in the wake of the crisis, but more than 44 million people are projected to still be out of work across the OECD area at end-2015, 11½ million more than before the crisis.

The OECD highlights a series of policy requirements for further strengthening the recovery. Monetary policy needs to remain accommodative, especially in the euro area, where a further interest rate reduction is merited, given low and falling inflation, and in Japan, where asset purchases should continue as planned. In the US, where the recovery is more firmly based, asset purchases by the Federal Reserve should be gradually phased out during 2014 and policy rates should start to be raised during 2015.

With financial fragilities persisting in Europe, the OECD said it is urgent to improve the health of the banking sector, complete the establishment of a fully-fledged banking union and sustain momentum for further reforms. The comprehensive assessment of euro area banks must provide reliable estimates of capital needs and be followed by swift recapitalisation, or if necessary, resolution.

The planned slower pace of fiscal consolidation in the US and some euro area countries is seen as warranted, given past efforts, but strong consolidation should proceed steadily in Japan, where the burden of public debt is very heavy and still growing.

More ambitious structural reform programmes are needed to create jobs and boost growth in advanced and emerging countries alike.

OECD Forum 2014: Resilient Economies for Inclusive Societies

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The OECD Forum 2014, taking place 5-6 May, will be organised around three cross-cutting themes: Inclusive Growth, Jobs, and Trust, exploring the multifaceted nature of resilience and how to now “bounce forward” in addressing economic, social, and environmental challenges.

Forum discussions will feed into the OECD Ministerial Meeting Resilient Economies and Inclusive Societies: Empowering people for jobs and growth, where government leaders and ministers discuss issues on the global agenda. This year’s Ministerial meeting will be chaired by Japan, to mark the 50th anniversary of Japan joining the OECD.

Inclusive growth

The crisis has drawn attention to the stark reality of growing inequality and the uneven distribution of burdens and rewards across society.

The Forum programme will reflect on OECD’s vision for Inclusive Growth that combines a focus on strong economic performance with outcomes that matter for people’s quality of life.

Debates will feature new policy alternatives profiling positive opportunities linked to innovative trends around the shared economy, “big data” and the “Internet of Everything”, and dealing with issues such as demographics and ageing, access to skills, health, inclusive and sustainable urban planning, climate change, and overcoming the middle income traps.

Jobs

Since the crisis, levels of inequality have been rising further; due to high rates of unemployment, long-term structural unemployment, in-work poverty, and low-paid employment in insecure jobs with little social protection.

In this context, the Forum will address progress on the OECD Action Plan for Youth, the potential for job creation through innovation, and how to ensure broader access to the knowledge and skills needed in the 21st Century Production process.

When addressing inequality, ensuring access to skills is key. Skills are critical to empowering individuals, to contributing to their resilience and flexibility in adapting to innovation, improving health outcomes, and increasing trust in political processes and peers.

Trust

The crisis has shone a spotlight on concerns about undue influence over public policy, and has led many to question the ability of our governments and institutions to find solutions.

Low levels of trust mean that fewer citizens vote. It also reduces social cohesion, makes reform difficult, limits access to financing and the capability of governments to re-launch growth. This is a central topic as we enter a year which will feature numerous elections in OECD countries, and in Brazil, Colombia, India, Indonesia, and South Africa.

The Forum will focus on challenges for the global community, relating to open and inclusive government, fair and transparent tax rules, corruption, financial regulation and financial inclusion, and long term-investment.

The Forum Programme is here.

Click on the camera to watch the webcasts of Forum sessions

The anxieties of the rich

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“What’s it like to have too much money?” Vanity Fair asked recently. “Very stressful.” The problem, it seems, is that even the humongously rich grow tired of just buying stuff. If you already own a dozen houses, a 13th is unlikely to make all that much of a difference. The same goes for sports cars, private jets, yachts, diamond necklaces and anything else you might care to splurge on.

So, after a while, you stop worrying about quantity and begin obsessing about quality: “What you need is to have not just the most but the very, very best,” writes A.A. Gill in the magazine, “ … a slightly better loafer, a pullover made from some even more absurdly endangered fur.” The name for this concern? Perfection anxiety.

Sadly, perfection anxiety is not the only worry creasing the botoxed brows of the super-rich. A few years back, there was the financial crisis, which threatened to knock a hole in their fortunes. And, more recently, there’s been what Paul Krugman calls the “Piketty Panic,” the tidal wave of publicity surrounding a new study that warns of a return to Victorian-era wealth divisions in our societies. We’ll come back to that in a moment, but, first, what about the crisis – did it hurt high-earners?

It did, says a new paper (pdf) from the OECD, but not for long. In nine OECD countries for which data are available, the top 1% of earners saw their incomes slide by 3% in 2008, followed by an even bigger fall of 6.6% in 2009. But as the incomes of high earners tend to be very responsive to economic swings, these sorts of declines in a recession aren’t such a surprise. Indeed, by 2010, the worst was over: The incomes of the top 1% rose by 4% while pretty much everyone else’s stagnated.

These temporary dips also didn’t do much to alter long-term trends. Top earners’ incomes remain at historic levels in many OECD countries, confirming a trend that has been developing for around three decades. In effect, what’s happened is that, as the economic pie grows, top earners have been taking an ever bigger slice of it. In the US, for example, the share of pre-tax income wending its way to the top 1% more than doubled since 1980, hitting 20% in 2012. There were notable rises in other (mostly) English-speaking countries, too, notably Australia, Canada, Ireland and the UK. More surprising, the 1% in traditionally egalitarian economies like Finland, Norway and Sweden also saw rises in their share of income, although at around 7 to 8% they were well behind US levels.

Not much of this will be unfamiliar to anyone who’s been following the debate over rising income inequality. But in recent weeks, discussion has been focusing on another side of the debate: wealth – rather than income – inequality. That might sound like hair-splitting, but the difference matters. To simplify greatly, income represents your earnings, typically from your salary or wages – think of it as a flow. By contrast, wealth is a stock – it’s the accumulation of income in your bank account that you haven’t frittered away, as well as your assets.

In the debate over inequality, income attracts most of the attention because it’s the best indicator of people’s ability to put food on the table and pay the bills. But thanks to Thomas Piketty, author of Capital in the Twenty-First Century, a 700-page economics tome that’s crashing the top of the bestseller lists, wealth is now also getting a lot of attention.

Piketty argues, in effect, that the gap between the super-rich and everyone else will increasingly be driven by wealth, rather than income (definitions of wealth vary, but Piketty broadly equates it with capital). To explain: Much of the justification for the rising gap between the super-rich and everyone else in recent decades revolves around the idea that they essentially deserved to earn their fortunes – Bill Gates created software that everyone wanted, and reaped his rewards.

But in future, the super-rich may be more likely to inherit their fortunes, rather than earn them. That’s because, argues Piketty, the rate of return on capital, typically around 5%, will outpace economic growth, these days often no more than 2%. So instead of worrying about gaps between those on high salaries and those on low salaries, in future we’re more likely to be concerned by the division between those on salaries and those with inherited wealth. Sounds familiar? Yes, it’s the world of Jane Austen all over again.

To say that Piketty’s book has been getting noticed would be an understatement: Martin Wolf calls it “extraordinarily important”, while the World Bank’s Branko Milanovic calls it “one of the watershed books in economic thinking”; others are less complimentary, criticising the data for being too thin to support the conclusions or accusing Piketty of promoting “soft Marxism”.

Whether you agree with his findings or not, there’s no doubt that the attention given to Piketty’s book, and to research by others, including the OECD, on inequality only underlines growing concern about the impact of rising divisions on our societies and economies. Anxious times, indeed.

Inequality will be under discussion at OECD Week(5-7 May 2014), which will see publication of a new report, “All on Board: Making Inclusive Growth Happen”. Watch out also for sessions at the OECD Forum on inclusive societies and jobs and inequality.

Useful links

We’re all free to be poor (OECD Insights blog)

OECD work on inequality

Divided We Stand (OECD, 2011)

Growing Unequal (OECD, 2008)