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Signs of spring?

11 March 2014
by Brian Keeley

Before you shift over to springtime mode, take a moment to recall the wild weather that swept across North America earlier this winter. Powered by a “polar vortex,” freezing air and storms repeatedly swept across the continent,  dumping deep piles of snow and stranding motorists in blizzards.

Something else may have been obscured by all those swirling snowflakes – the state of the economy. To explain, not only did the harsh weather make everyone’s life miserable, it also dragged down the economy in North America – shops were forced to close, flights were cancelled, people couldn’t get out of their homes. That, in turn, is reflected in the economic data for last quarter of 2013 and (probably) the first quarter of this year, which showed an unexpected dip.

But this winter blip looks to be masking what is otherwise a fairly rosy picture for major G7 developed economies, according to the OECD’s latest economic assessment. The assessment, released today, argues that economic growth in the G7, including, of course, Canada and the United States, is probably strengthening, despite fluctuations caused by the one-off winter weather (and the U.S. government slowdown in October) and an imminent tax revision in Japan.

There’s less encouraging news for the emerging economies. According to the OECD economists, a number of these economies are now experiencing a “marked loss of momentum”. As these economies now account for more than half of the world economy, that’s likely to curb global growth.

 Interim outlook

Source: Interim Economic Assessment, 11 March 2014.

Overall, then, first-half growth for the G7 economies looks set to be well up on the equivalent periods in 2012 and ’13. But, largely as a result of those one-offs, it’s likely to fall below second-half 2013 growth (although the OECD economists don’t rule out the possibility that this apparent dip in momentum may be due to more than just snow).

The performance of the Eurozone countries, however, continues to be spotty. Germany is doing well and is forecast to see annualised growth of 3.7% in the first quarter, but France will hover around 1% while Italy will be slightly under 1%. And while  unemployment is showing encouraging signs of easing elsewhere, it’s showing little signs of improvement in the Eurozone.

What about the risks to all these forecasts? As we noted recently, the Great Recession highlighted failings in forecasting at the OECD and other international institutions. In response, forecasts now place a much greater emphasis on why they could be wrong, either because they’re too optimistic or too pessimistic.

On the positive side, the OECD economists are encouraged by signs that political tensions in Washington over government financing and the debt ceiling have eased, and by indications that Europe’s troubled banks are stabilising.

On the downside, and despite the progress so far of “Abenomics,” they’re concerned by the continuing challenges that Japan is facing from its huge public debt. The Eurozone, too, is not out of the woods, while China may be facing a risk of a “sharp slowdown”.

And, of course, there’s the continuing question of how emerging economies will respond to the slow return to normal monetary policy, especially in the U.S.  The impact of the “taper” was clear in these economies both last year and in January, with currency weakness and falling prices for bonds and equities in a number of emerging economies. If these problems continue or worsen, that could be bad news for the global economy.

Useful links

OECD Interim Assessment

OECD economic analysis and forecasting

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