“The global economy is weakening again”

If you’ve been following economic events over the past five years, the headline on this posting – which is also the opening line from the OECD’s latest Economic Outlook – won’t surprise you. In the wake of the financial crisis, a pattern has emerged: global recovery is weak, doesn’t last long, and soon gives way to a slowdown if not outright recession.

A major factor behind this latest slowdown is a loss of confidence, and that in turn is being fuelled in part by events on either side of the Atlantic. In Europe, despite progress in creating systems to shore up the euro, governments still have some way to go before finally fixing the single currency. In the United States, legislators have until only the end of next month to steer away from the “fiscal cliff”. Tipping over the edge would automatically raise taxes and cut government spending.

“If policymakers in the United States fail to reach agreement on tax hikes and spending cuts, they face a ‘fiscal cliff’ that could tip an already weak economy into recession,” warns Pier Carlo Padoan, the OECD’s Chief Economist in this video.

Assuming the US doesn’t go over the cliff, the OECD is forecasting that the American economy will grow by 2.0% in 2013, slightly down on this year’s estimated 2.2%. For Europe, it sees a contraction of 0.1%, a slight improvement on 2012’s estimated decline of 0.4%.

There’s brighter news in some of the emerging economies, where policy action such as investment in infrastructure and cuts in interest rates are helping to make up some of the slack caused by weakening global demand. After slowing to an estimated 7.5% this year – the lowest rate for a decade – China is forecast to see growth of 8.5% in 2013. India, which has been in an economic funk lately and saw growth slip to an estimated 4.4% in 2012, is tipped to rebound to 6.5% in 2013.

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There’s clear concern in the Economic Outlook that governments won’t act quickly or decisively enough to tackle some major challenges. This is particularly true of the problems in the euro area, which, says the OECD, remain “the greatest threats to the world economy” despite the steps taken so far by euro zone leaders. The OECD’s economists looked at what could happen if there was a substantial increase in the zone’s financial stresses, even without the exit of a euro member. In such a situation, they warn, Europe’s economy could contract by at least 2.2% in 2013 and by 4.2% in 2014, unemployment could rise by at least 2 percentage points and equity prices could drop by 40%.

There’s concern, too, about the rising toll of unemployment in OECD countries. Around 50 million people are  jobless at the moment and that’s having a major social impact, including fuelling economic inequality. The push by many governments to get their finances back in order – through cuts in spending and increases in taxes – risks exacerbating the problem. But, as the OECD research shows, that needn’t be the case. For example, the OECD economists suggest, a government that chooses to raise income taxes rather than cutting down on income support for poorer families could actually narrow inequality. Critics, of course, would argue that such a move risks crimping long-term growth, and they may well be right. Nevertheless, the growing concern over inequality in many OECD countries means there may be more of an appetite for such actions than there was in the past.

Useful links

OECD economic analysis and forecasts

Brian Keeley

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