Growth ahead, but risks are many*

The latest economic forecasts from the OECD could be summed up in four words: More growth, more risks. The “more growth” part is perhaps the easiest to explain. According to OECD economists, the world economy should continue to strengthen its recovery over the next couple of years, albeit at a slower pace than in previous recoveries. The OECD is forecasting global growth of 2.7% for this year, rising to 3.6% for 2014 and 3.9% in 2015.

These numbers might look encouraging, but they’re down – by about half a percentage point – since the OECD’s last forecasts in May. That downward revision is due in large part to the slowing performance of the emerging economies, other than China.

Digging a little deeper, the OECD is forecasting a strengthening performance in both the United States and the euro zone, with the U.S. economy forecast to grow by 2.9% in 2014 (click on the map below for detailed data). The euro zone won’t be able to match that pace, but next year’s forecast expansion of 1% would certainly be welcome after several years of sluggish performance. By contrast, after racking up forecast growth of 1.8% this year, Japan’s pace of expansion is tipped to slow to 1.5% in 2014.

Disappointingly, the upturn in OECD economies may not do much to bring down unemployment. The jobless rate in OECD countries is projected to fall by only half a percentage point, to 7.4%, by the end of 2015, a slower decline than had been expected.

Of course, all these forecasts will only pan out if the world economy manages to avoid those risks we mentioned. Some of these will be all too familiar to regular readers of the blog, such as continued concerns over Europe’s banks. Others have emerged more recently – indeed, they’re responsible in large part for the OECD’s lowering of its growth forecasts.

The most notable, perhaps, is the increasing uncertainty over the emerging economies, other than China. Even though the emerging economies have stronger growth prospects than developed countries, they face a growing list of challenges, including less favourable demographics and diminishing opportunities for “catch-up” growth. Their vulnerability was highlighted over the summer when investors pulled out of emerging economies in expectation that the Federal Reserve, or U.S. central bank, would begin returning to the sort of “normal” monetary policies that were suspended in response to the financial crisis. In the event, that didn’t happen, but, as the latest OECD Economic Outlook points out, the turmoil that followed even discussion of it “revealed how sensitive some EMEs [emerging market economies] are to U.S. monetary policy.” For now, the situation in the emerging economies appears to have stabilised, but there must be concerns over what will happen when the U.S. does eventually change course on its monetary policy.

On a long list, two other risks are also worth noting briefly. The first concerns the political situation in the U.S., which has led to a series of showdowns between legislators and the executive. “The episode of budget brinkmanship in October 2013 has once again shaken global markets and harmed consumer confidence,” notes the Economic Outlook. To avoid a repeat, it says, “The debt ceiling needs to be scrapped and replaced by a credible long-term budgetary consolidation plan with solid political support.”

And then there’s the concern over the potential for deflation in the euro zone. To explain, prices tend to rise most of the time in developed countries – a process called inflation. By contrast, falling prices – or deflation – are much less common. If deflation kicks in, it can be very hard to turn it around – consumers may put off purchases in expectation of lower prices next month or next year, so reducing demand and creating a self-sustaining spiral. To reduce the risk of deflation taking hold, the European Central Bank cut interest rates earlier this month, which should boost demand. But, says the Economic Outlook, it should be prepared to take further measures if deflation risks intensify.

*OECD Insights Blog