Pace of recovery slowing, says OECD. Hopes for a rapid rebound in the global economy receive another blow in the latest OECD economic update. It suggests that the pace of economic recovery is slowing, and by more than had previously been expected. But although the situation is extremely uncertain, fears of a double-dip recession look to be misplaced. “The uncertainty is caused by a combination of both positive and negative factors,” OECD Chief Economist Pier Carlo Padoan said at the launch of the Interim Assessment in Paris this morning. “But it is unlikely that we are heading into another downturn.”
Those negatives include the possibility that consumers will continue to keep a tight hold on their purse strings, so reducing demand in the economy. The reasons for that vary: some people may be paying off debts while others may put off spending because of unemployment, or the fear of losing their job, and concerns over continued weakness in house prices. On the plus side, the OECD says corporate profits are “robust” and that levels of private investment are so low they can probably now only go in one direction – up. (A decline would take even more steam from the economy.)
The OECD also believes that the worst of the turmoil on financial markets may now be over, although risks remain, and notes that emerging economies like China and India are doing well, which should benefit the wider global economy. As for the hard numbers, the OECD sees the pace of economic growth slowing over the course of this year in the G7 countries. It cites GDP growth of 3.2% in the first three months of 2010 and 2.5% in the second quarter, and forecasts falls to 1.4% in the third quarter and just 1% in the fourth.
Useful links OECD work on economics
Insights: From Crisis to Recovery
Jobs – or the lack of them – are on attendees’ minds at an OECD Forum session entitled, “How to avoid a jobless recovery”. As moderator Chris Giles, economics editor of the Financial Times, points out, the economic recovery following the recession has yet to be matched by a fall in unemployment (which the OECD projects will peak at about 8½% this year). Concern over unemployment comes against a backdrop of increasing pressure to cut state spending, which many fear could impede efforts to cut joblessness.
And it isn’t simply joblessness that’s a concern, but also long-term and structural unemployment, says Richard Trumka, President of the American Federation of Labor-Congress of Industrial Organizations (AFL-CIO). He believes workers in the United States are “angry, anxious and going through tremendous amounts of pain”, and warns that headline economic figures don’t really reflect the experience of workers. “All the GDP in the world doesn’t mean there’s a recovery. Until people are back in work, they won’t believe in a recovery.”
The jobs crisis is being felt particularly by young people, according to Luca Scarpiello, a board member of the European Youth Forum. He’s been responding to a question about fears of the crisis creating a “lost generation” of young people who suffer permanently reduced job prospects. For young people, he says, that would mean experiencing unemployment as a structural part of their lives, and relying on short-term labour contracts that offer little in the way of training or skills development. The risk of a lost generation also represents a tremendous potential waste of human capital – after all, he says, “we are the most trained generation in history”.
So, what to do? Panellists are discussing ways in which government policies could tackle unemployment – and the risk that cuts in government spending could actually make things worse. The big run-up in government spending during the crisis has raised deficits and public debts, and there’s intense pressure for governments to get their financial houses back in order. That probably means spending cuts.
But as Pier Carlo Padoan, the OECD’s Chief Economist, has pointed out, we must make the right cuts: In some cases, it might even be a good idea to raise spending – especially in growth-friendly areas like R&D and education. But, considering the still-fragile state of OECD economies, is it too soon to be talking about fiscal consolidation? The noted British economist, Robert Skidelsky, has sounded a warning note. “Many economies are on a life-support system,” he says. “Economic output would be reduced if support was turned off.” And, responding to a question from the floor, he’s also queried the benefits of cutting public jobs: “I am always amused by those who prefer the total waste of unemployment to the partial waste of a large public bureaucracy.”
Nevertheless, as announcements from several governments in Europe this week have underlined, consolidation now seems to be the order of the day. But, as Chris Giles has reminded governments in his summing up, that needs to be balanced with a determined effort to cut unemployment.
This post comes to us from Mark Hannam, honorary Research Fellow at the Institute of Philosophy at the University of London.
European governments face a problem. They have borrowed to finance fiscal deficits during the recession and now they must repay their debts. Taxes will rise and public spending will fall. None of this is popular with voters, but it must be done.
In this era of austerity there is much talk about “doing more with less”. This is a worthy goal: who would be in favour of doing less with more? But the rhetoric of public spending cuts disguises an important distinction between the level of spending and the quality of spending.
For economists “savings” are the excess of income over consumption, or deferred consumption. We save now so we can consume later. The balance between current consumption and future consumption depends upon our circumstances: in times of plenty it is prudent to save, in times of shortage in makes sense to consume. It was ever so.
The idea that we should try to “get more for our money” is somewhat different; it suggests that we spend wisely, ensuring that we do not overpay for products and services. It is hard to argue against the idea that we should optimise the value we secure for each pound, euro or dollar spent.
So, two rather different ideas: one proposes that we consider the balance between present consumption versus future consumption, the other proposes that we should always spend wisely, making the best of the resources we have.
Governments should always spend wisely, but today they have much less to spend. As we enter several lean years of public spending we can be sure the politicians will tell us that they are doing more with less. Very good. But when the fat years come back, we should continue to insist that we get good value for our money.
We are publishing From Crisis to Recovery, a new book from the OECD Insights series here on the blog, chapter-by-chapter. This book traces the roots and the course of the crisis, how it has affected jobs, pensions and trade, while charting the prospects for recovery.
These chapters are “works in progress” and their content will evolve. Reader comments are encouraged and will be used in shaping the book.
Is there – to misquote William Shakespeare – something rotten with the state of capitalism? In the wake of the financial crisis, many people seem to think there is. According to a poll commissioned by the BBC World Service of people in 27 countries, only around one in ten believed capitalism works well. In just two of the surveyed countries did that number rise above one in five – 25% in the United States and 21% in Pakistan.
Unhappy as people were, the poll showed little appetite for throwing out capitalism altogether – fewer than one in four supported that notion. But people do want change – reform and regulation that will check capitalism’s worst excesses.
That view is shared by many political leaders. In 2009, Germany’s Chancellor Angela Merkel and the Netherlands’ then-Prime Minister Jan Peter Balkenende argued that “it is clear that over the past few decades, as the financial system has globalised at unprecedented speed, the various systems of rules and of rules and supervision have not kept pace”. In the United States, President Barack Obama declared that “we need strong rules of the road to guard against the kind of systemic risks that we’ve seen”. In the United Kingdom, Prime Minister Gordon Brown said that “instead of a globalisation that threatens to become values-free and rules-free, we need a world of shared global rules founded on shared global values”.
But what form should those rules and values take? How can we best harness capitalism’s power to deliver innovation and satisfy our material needs while minimising its tendency to go off the rails from time to time.
This chapter looks at some of the themes that have emerged in reform and regulation since the crisis began, focusing on three main areas:
►Regulating financial markets
►Tackling tax evasion, and
►Creating a “global standard” for ethical behaviour
Rising national debt is fast emerging as perhaps the most worrying hangover from the recession. The latest warning comes from the IMF, which says sovereign debt risks triggering a new round of economic woes.
“If the legacy of the present crisis and emerging sovereign risks are not addressed, we run the real risk of undermining the recovery and extending the financial crisis to a new phase,” said Jose Vinals, director of the IMF’s monetary and capital markets department.
As noted previously on the blog, sovereign debts rose substantially during the crisis as government spent heavily to keep economies afloat. In the OECD area, government debt looks set to equal about 100% of GDP in 2011, up from about 70% before the crisis. That debt, along with government purchases of banks’ bad assets, means that in advanced economies “the biggest threats [to financial stability] have moved from the private to the public sectors”, says the IMF.
There is some good news in the Fund’s latest Global Financial Stability Report: Although banks and financial institutions remain in a “fragile” state, they are – says the IMF – “slowly regaining their health”.
The Special Investigation Commission released its report earlier this week. In more than 2,000 pages it paints a picture of reckless expansion in Iceland’s financial sector. It states that Iceland’s three main banks grew 20-fold in just seven years, a pace that “was not compatible with long-term interests of a strong bank”.
The report heavily criticises regulators and government, accusing them of “extreme negligence”, reports the Financial Times , while regulators were “in general understaffed and lacked experience”, adds the BBC .
But it also contains more than a suggestion of wrongdoing in the banks themselves: “According to all the loan-books from the banks, all the former owners of the three banks had inappropriate loans from the banks,” Sigridur Benediktsdottir, a member of the commission, told the FT.
Iceland wasn’t the only country whose financial sector ran into trouble. Many have wondered if the banks were “unlucky” – could they have avoided collapse if the financial crisis hadn’t hit? The report says no. In a “post mortem” annex , Mark Flannery of the University of Florida comments that the “sub-prime financial crisis surely added pressure on the banks … However, the banks had ignored repeated warnings that their size and rapid expansion exposed them to great risks. It seems likely that they would have come to grief eventually, even without a worldwide financial crisis.”
Economies may be recovering, but one problem looks set to linger – unemployment . The situation is especially severe for young people (15-to-24-year-olds). Currently, there are nearly 15 million unemployed young people in OECD countries, about four million more than at the end of 2007. (Explore the numbers at the OECD Factblog.)
As the recovery gathers pace, unemployment should begin to ease. But there’s a real concern that this recession will still create a “lost generation” of young people who, as a result of being unemployed in their teens and early twenties, face a lifetime of diminished job prospects.
What’s to be done? A paper just released by the OECD explores some possible solutions. These could include providing young people with a wider range of training and education opportunities, both academic and vocational, as well as offering those who leave school early with a “second chance” to get some skills. It could also mean making changes to employment protection rules that can trap young people in short-term, dead-end jobs.