World’s economies bounce back, see exit – OECD

PARIS: China, Asia and the United States are pulling the world out of an economic vortex with surprising if “modest” speed, the Organization for Economic Cooperation and Development (OECD) declared on Thursday.

Asian economies underpin the recovery, and the United States is in the midst of a sudden rebound, switching to expected 2.5-percent growth next year from 2.5-percent recession this year.

But leading economies are now in an exit dilemma over huge debt and rescue spending.
The recovery is uneven, unsteady and unpredictable, the OECD said.

This assessment was mirrored earlier by US President Barack Obama in comments during his Asian trip on the need to support recovery but contain debt.

He said it was important to recognize “that if we keep on adding to the debt, even in the midst of this recovery, that at some point people could lose confidence in the US economy in a way that could actually lead to a double-dip recession.”

The OECD report on the global outlook concealed a big surprise in a table of data showing that at the current rate of recovery, worldwide activity will be back to normal within 25 months’ time.

“The upturn in the major non-OECD countries, especially in Asia and particularly in China, is now a well established source of strength for the more feeble OECD recovery,” the report said.

The major issue “in many of these countries is now becoming one of withdrawal of stimulus so as to avoid igniting asset or general price inflation.”

The US economy will shrink by 2.5 percent this year but make a big leap to growth of 2.5 percent next year and 2.8 percent in 2011, the OECD forecast.

The global backdrop, however, is a grimly hostile landscape of legacies from the crisis and before, the OECD outlined in its bi-annual global outlook.

The acute mix of factors ranges across public finances, removal of financial life support programs, restructuring for growth, rising unemployment, near-zero interest rates, global imbalances and foreign exchange instability.

The worst of the crisis in terms of plunging economic activity will have lasted about 18 months, the OECD data suggests.

In 2008, the year the crisis began to spin economies downwards, the US economy managed narrow growth of 0.4 percent.

The eurozone, which did better in 2008 with growth of 0.5 percent, is now trailing on the comeback climb. It will shrink by 4 percent this year, and then grow by 0.9 and 1.7 percent in 2010 and 2011.

Japan is heading from shrinkage of 0.7 percent in 2008, recession of 5.3 percent this year, to growth of 1.8 and then 2 percent.

But the deeper underlying, medium-term story lies in OECD estimates for what it calls “world growth” for its 30 leading industrialized members plus China, India, Russia and Brazil.

World growth in 2011 will be 3.7 percent, about the same as the average in the decade up to 2006.

These estimates are considerably brighter than the OECD’s recent forecasts, although they point to “a modest underlying rate for some time.”

The last OECD assessments, issued in early September, forecast third quarter US growth limited to 1.6 percent. In fact the US economy expanded 3.5 percent in the July to September period.

Despite the improving outlook, the OECD had harsh words for the scale of rescues for auto industries, and harsher words still for governments shirking announcement of “radical” overall exit and structural reform strategies.

“It is regrettable that so few exit strategies have so far been articulated,” it said, reporting that fewer than half of the 30 OECD countries had announced clear targets for attacking budget deficits, and the policies to be launched.

But “preparing exit strategies cannot be put off,” the OECD said.

“Government budgets have suffered badly from the crisis and gross debt could exceed gross domestic product on average in the OECD by the year after next,” the report warned.

“Stopping the rot is clearly necessary and will call for fiscal [budget] consolidation that is substantial in most cases and drastic in some.”

However, excluding the dilemmas facing some countries under acute pressures, reform of budgets “should not proceed at a pace that undermines the recovery.”

Rapid action on “long overdue reforms to pension and health schemes” could help underpin confidence on financial markets.

The drop in world trade, a factor in spreading the crisis globally, was giving way to a “rebound which may prove faster than expected.”

And global imbalances, “notably the US [external] deficit and the China surplus, have narrowed appreciably during the downturn.”

This was reference to huge trade and payments imbalances by the United States and largely matching surpluses held by China, which many analysts say were a pivotal long-term cause of the crisis.

But this adjustment may now have run out of steam, and the imbalances remained at exceptionally high levels, the report said. In an implicit reference to weakness of the dollar, the OECD warned that therefore “the risk of disorderly exchange rate adjustments cannot be excluded.”

And in this post-crisis landscape, there are threatening shadows of deflation together with asset-price inflation. Deflation because of low activity and high unemployment: asset inflation because of easy-money stimulus. –AFP