Business Standard

Stronger policy response needed to avoid risks to growth, especially in the euro area, says OECD in latest Economic Outlook

Image

Capital Market

Although inflation is falling in India, monetary policy should not be loosened until inflation expectations adjust downward and the path of disinflation is well-entrenched

Modest global economic forecasts, continuing high unemployment, and downshifts in potential output should spur governments with a greater sense of urgency to fully employ monetary, fiscal and structural policy levers to support growth, notably in Europe, according to the Economic Outlook

The Economic Outlook draws attention to a global economy stuck in low gear, with growth in trade and investment under-performing historic averages and diverging demand patterns across countries and regions, both in advanced and emerging economies.

 

We are far from being on the road to a healthy recovery. There is a growing risk of stagnation in the euro zone that could have impacts worldwide, while Japan has fallen into a technical recession, OECD Secretary-General Angel Gurria said. Furthermore, diverging monetary policies could lead to greater financial volatility for emerging economies, many of which have accumulated high levels of debt.

Global GDP growth is projected to reach a 3.3% rate in 2014 before accelerating to 3.7% in 2015 and 3.9% in 2016, according to the Outlook. This pace is modest compared with the pre-crisis period and somewhat below the long-term average.

The euro area is projected to grow by 0.8% in 2014, before slight acceleration to a 1.1% rate in 2015 and a 1.7% rate in 2016.

A prolonged stagnation in the euro area could drag down global growth and have knock-on effects on other economies through trade and financial links. A scenario in the Outlook shows how a negative shock could lead an extended period of very low growth and very low euro inflation, resulting in unemployment remaining at its current unacceptably high level.

With the euro zone outlook weak and vulnerable to further bad news, a stronger policy response is needed, particularly to boost demand, said OECD Chief Economist Catherine L Mann. That will mean more action by the European Central Bank and more supportive fiscal policy, so that there is space for deeper structural reforms to take hold. A Europe that is doing poorly is bad news for everyone.

Among the major advanced economies activity is gaining strength in the United States, which is projected to grow by 2.2% in 2014 and around 3% in 2015 and 2016. In Japan, growth was impacted by consumption tax hikes in 2014, with expected growth of only 0.4% in 2014, and rises modestly to 0.8% in 2015 and 1% in 2016.

Large emerging economies are projected to show diverging performance over the coming years. A slowdown in China, towards more sustainable growth rates, will see GDP growth drop from a 7.3% growth rate in 2014 to a 7.1% rate in 2015 and a 6.9% rate in 2016. However, the rapid increase in credit, rising share of non-bank credit as well as housing market and local government activity are raising concerns about financial stability. A scenario in the Outlook shows that a 2-percentage point decline in the growth of Chinese domestic demand would lower global GDP by 0.3 percent per year.

The Chinese authorities will need to use all of their policy instruments to keep the economy on an even keel, Ms Mann said.

Activity is projected to pick up gradually in India. Corporate investment is recovering swiftly as business confidence has been boosted by the decline in political uncertainty and the commitment by the government to reduce red tape. Efforts to put large stalled infrastructure projects back on track are also beginning to pay off. Tight fiscal and monetary policies are needed to contain inflation, but will also restrain domestic demand. The current account deficit will increase slightly as domestic demand strengthens but remain sustainable.

Although inflation is falling in India, monetary policy should not be loosened until inflation expectations adjust downward and the path of disinflation is well-entrenched. The adoption of the proposed flexible inflation-targeting monetary policy framework would help to stabilise expectations around the target. Fiscal consolidation should be pursued, but it is critical to improve its quality. Reviving inclusive growth will require deep structural reforms to better target subsidies, increase further investment in social and physical infrastructure, improve the business environment and modernise labour and tax laws.

Powered by Capital Market - Live News

Don't miss the most important news and views of the day. Get them on our Telegram channel

First Published: Nov 25 2014 | 5:18 PM IST

Explore News