OECD Economic Outlook: Global recovery firmly underway but surrounded by risks

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The global recovery is firmly under way, but taking place at different speeds across countries and regions, according to the OECD’s latest Economic Outlook.

Historically high unemployment remains among the most pressing legacies of the crisis. It should prompt countries to improve labour market policies that boost job creation and prevent today’s high joblessness from becoming permanent.

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 recovery is 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.

But there are downside risks, including 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. Financial vulnerabilities remain 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 top challenge facing countries continues to be dealing with widespread unemployment, which affects more than 50 million 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.

Stronger competition in retail trade and professional service sectors could also lead to greater job creation, and should be considered as part of wider structural reform programmes in advanced and emerging economies alike.

In advanced economies structural reforms can play a greater in role in boosting growth as governments are forced to withdraw fiscal and monetary stimulus launched in reaction to the crisis.

In emerging-market economies, structural reforms have the potential for making growth more sustainable and inclusive, while contributing to global rebalancing and enhancing long-term capital flows.

Emerging economies must also pay particular attention to the danger of overheating, which is increasing inflationary pressures, and in some cases, widening current account imbalances.

Countries must also make progress toward their fiscal consolidation goals, which are  increasingly urgent. 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. This is about 30 percentage points above the pre-crisis level. “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,” Mr Gurría said.

OECD Chief economist Pier Carlo Padoan talks about the Economic Outlook

Coming soon to a screen near you …

Even better on Monday

“That action is best which procures the greatest happiness for the greatest numbers.” Francis Hutcheson (1694-1746)

What’s in a number? If the number is GDP, the answer is almost everything or not enough, depending on your point of view. To some economists, GDP is a good – or as good as we’re ever likely to get – measure of progress. If an economy’s growing, then people are (probably) getting richer and able to spend more on the things they need and the things they want. Ergo, progress.

But to others, not least the Nobel laureate Joseph Stiglitz, as well as a growing number of social scientists and  environmentalists, GDP leaves out a lot. (Indeed, the strengths and failings of GDP as a measure are being debated right now at The Economist.) Yes, it may show economic growth, but it doesn’t show if that growth is sustainable, if it’s creating unwanted side-effects like pollution, or who’s benefiting. To use an analogy from the WWF, GDP is a great speedometer, but doesn’t a car need other indicators – a dipstick in its petrol tank, brake lights, temperature gauge?

Such questions have come to the fore in recent decades. Increasingly, people are asking if we should pursue economic growth – rising GDP – for its own sake. In the eyes of many, growth has come to be associated with environmental disaster, growing social inequality and – especially in the wake of the 2008 financial meltdown – instability. None of this is fully reflected in GDP.

Does that matter? Yes. “Statistics are not an end in themselves,” says the OECD’s Angel Gurría. “Their importance lies in the policy discussions they stimulate as much as the evidence they provide.” In other words, what we measure governs the things we strive for,  And if we can’t measure what’s really happening in our lives we won’t design  policies that best serve our economic, social and environmental needs. That’s why numbers matter.

But which numbers? Over the past 80 or so years, our societies have been gathering ever more hard data – first on the economy, then on the health of our societies and later about the environment – as well as “soft” data (like, “do you feel happy?”). Indeed, so much is now available that it can be hard to work out what matters and what doesn’t. In response, there have been numerous attempts to combine data to show the progress of people and societies, for example the Genuine Progress Indicator, the UN’s Human Development Index and the European Commission’s Beyond GDP project. Governments are getting interested, too: Late last year, the UK government announced plans to measure people’s “happiness”.

The question has also been the focus of a lot of work here at the OECD – since 2008, the OECD has hosted the Global Project on Measuring the Progress of Societies, which has its own wiki – wikiprogress.org

And next week, the story of measuring progress steps up a pace with the launch of  (drum roll, please) … Your Better Life Index

Unlike other projects, Your Better Life Index is fully interactive and reflects primarily the interests and concerns of you, the user. So, rather than the OECD ranking countries in terms of quality of life, it’s up to users like you to rate your country on the things you feel make for a better life – housing, income, education, the  environment and so on. You can share your findings with other users, and over time Your Better Life Index will build up a picture of the issues that people in OECD countries and, eventually, further afield, believe are most important to their societies.   

It all goes live here during OECD Week on May 24 at 10am in Paris (5pm in Tokyo, 9am in London and 4am in New York).

Useful links

Measuring Progress on YouTube

The Beautiful Game and the Dismal Science

Today’s post is from Eva Marikova Leeds of the Department of Economics and Business, Moravian College and Michael A. Leeds of the Department of Economics, Temple University.

But is it level?

Every four years, economists around the world turn their attention to something of true interest to the world’s population – predicting who will win the World Cup.

Studies of what it takes to succeed in international football have confirmed that it pays to be big and it pays to be rich.

Countries with large populations and high GDP per capita have higher FIFA rankings and have more success in World Cup competition. 

By that standard, the United States should be an odds-on favorite for this year’s World Cup.  Of the 32 countries currently competing in South Africa, the United States is the most populous and has the highest GDP per capita (after adjusting for purchasing power). 

Obviously, population and income are not the sole determinants of success, as only the most wildly optimistic fans of Team USA expect it to get anywhere near the final round.  In a paper that was published in the August 2009 issue of the Journal of Sports Economics, we confirmed the finding that large, rich nations have greater success in international soccer competitions than small, poor nations. 

But we find that the importance of income and population – and hence the United States’ advantage – fall as they become larger.  More importantly, we also found that a variety of other economic, political, and institutional factors play an important role in a nation’s soccer prowess: 

  • It pays to be a well-to-do democracy.  Even when one controls for GDP per capita, countries that are members of OECD do better than other nations.  More than half of the teams in this year’s World Cup Finals belong to OECD. 
  • Currently communist countries have more success in soccer.  Thus soccer is one of the few venues in which North Korea’s regime has helped its country.
  • The old colonial order continues to hold when it comes to soccer, as the former colonial powers – England, France, Netherlands, Portugal, and Spain (all of which are in this year’s World Cup Finals) – do better than other nations.  
  • Oil-exporting countries do better in international soccer competition.  In this year’s final, that would give an advantage to Mexico and Nigeria.  
  • Perhaps the most important indicator of international success is a nation’s commitment to soccer.  We measured this commitment in two ways.  First, we found that nations that had hosted the World Cup (which 13 finalists have done) did better in international soccer.  Our second measure used the number of teams to reach the quarterfinals of Confederation competitions, such as the UEFA Champions League or the Copa Libertadores.  We found that a country’s national team did better as more of its club teams (which might or might not feature home-grown talent) reached the confederation’s quarterfinals.  This gives a big edge to England and an even bigger edge to Brazil.

What does all this mean for the upcoming World Cup Competition?  We applied our econometric results to data for 31 of the 32 nations competing in the finals (missing data led us to exclude North Korea) and found that the favorite is – surprise of surprises – Brazil. 

It just goes to show that economic analysis sometimes predicts the obvious.

Useful links

The OECD looks at Competition Issues Related to Sports (Yes, that really is the title).

China: Back to the future

 

Photo courtesy of Jacques Bron

Coinciding with the China Development Forum in Beijing, the Insights blog is focusing on China this week

Amid all the talk of China’s economic resurgence, it’s easy to forget that the country once accounted for a much larger slice of global GDP than it does today. According to research by renowned economic historian Angus Maddison, China accounted for close to a third of global GDP in the 1820s. Estimates vary on its current share of global GDP, but based on the most recent World Bank estimates, it’s around 12%.

To find out more and to see the numbers, go to the OECD Factblog.

 

Useful links

OECD work on China

The OECD’s Chinese-language site – 网站(中文)

The World Economy: A Millennial Perspective, by Angus Maddison

The World Economy: Historical Statistics, by Angus Maddison

China at the OECD Development Centre

Photos by Jacques Bron

China: back to the future

Napoleon Bonaparte never visited China, but his reflections on its future role on the global stage have stood the test of time. “Let China sleep,” he wrote about 200 years ago, “for when she wakes, she will shake the world.” Ironically, back in Napoleon’s day China’s share of the global economy was far larger than it is today, according to the economic historian Angus Maddison. The chart is based on data from his monumental economic study of the second millennium, The World Economy: A Millennial Perspective, which was published by the OECD in 2001. In the early 19th century, China’s share of the economy stood at just under 33%, according to Maddison, but fell to 4-5% in the 1960s and 1970s before recovering to reach about 12% in 2000, the latest year this study provides. China’s global share has continued to rise since then, as more recent, albeit differently based, World Bank estimates indicate. But why the earlier long decline? Maddison splits the millennium into two parts – before 1820 and after… (more…)