Recent Economic Developments p

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Recent Economic Developments p

Presentation to Council

P i 13

^th

S b 2010 Paris, 13

^th

September 2010

Pier Carlo Padoan

1

OECD Chief Economist and Deputy Secretary‐General

Council

13 September 2010

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Outline

• Forces shaping the outlook

• Main weaknesses and strengths

• The appropriate policy response e • The appropriate policy response

Outline

2

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The outlook

Recent high‐frequency indicators point to a slowdown in the pace of recovery of the world economy that is somewhat more pronounced than previously anticipated

ook

According to the OECD short‐term forecasting models, growth could slow in the G7 economies to an annualised rate of about 1½ per cent in the second half of the year

The outlo

3

second half of the year

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The pace of recovery could be slower than anticipated

Interim Assessment – 9 September 2010

Annualised quarter‐on‐quarter real GDP growth, in per centq q g , p

utlookEconomic Ou

4 1. Refers to OECD Economic Outlook No. 87 projections (published in May).

2. Weighted average average of the three largest countries in the euro area (Germany, France and Italy).

Source: OECD, System of National Accounts database; Datastream; Markit Economics Limited; OECD Economic Outlook 87 database; and OECD Indicator Model forecasts.

E

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Business confidence has weakened

Purchasing Managers’ Index for manufacturing

fidenceusiness conf

5 Source: Markit Economics Limited.

Bu

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The bounce‐back in industrial production is moderating

Year‐on‐year percentage changes

sBusines

6 Note: Data for China are OECD estimates.

Source: Datastream.

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Moving forward

Private consumption growth may be constrained by additional household balance‐sheet repair; negative wealth effects, should house prices weaken further;

ses wealth effects, should house prices weaken further;

and uncertainty about unemployment. There can also be negative feedback effects from a weak economy to the financial sector.

Weakness

7

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The housing market has lost momentum

Proportion of OECD countries with rising real house prices Based on quarter‐on‐quarter change

gHousing

8 Note: House prices are deflated by the private consumption deflator. Calculation based on 19 countries (17 available in 2010 Q1).

Source: OECD Economic Outlook 87 database; and various national sources.

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Unemployment rates appear to have peaked, albeit at high levels

In per cent of the labour force

rketsLabour Mar

9 Source: OECD, Main Economic Indicators database.

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On the other hand, investment is low and corporate profits are strong, which could underpin a pick‐up in capital spending. In addition, inventories are back hs in capital spending. In addition, inventories are back

down to normal levels, financial conditions have stabilised, and inflation remains low

Strength

10

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Corporate profits have risen strongly

rofitsCorporate p

11 Note: Seasonally adjusted series.

Source: Bureau of Economic Analysis; Eurostat; and Datastream.

C

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The build‐up in inventories has dissipated

esInventori

12 1. Business inventories/sales ratio, index (Jan. 1992=100).

2. Inventories/shipments ratio, mining and manufacturing, index (2005=100).

3. Stock of finished goods, net balance, relative to normal.

Source: Datastream; and OECD calculations.

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Financial conditions have stabilised, …

OECD Financial Conditions Index¹

eFinance

13 Note: A unit decline in the index implies a tightening in financial conditions sufficient to produce an average reduction in the level of GDP by 1/2 to 1% after four to six quarters. See details in Guichard et al. (2009).

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But bank credit default swap rates are volatile

Basis points

eFinance

14 Note: Banking sector five-year credit default swap rates for major banks.

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Underlying inflation remains low

12‐month percentage change

Prices

15 Source: OECD, Main Economic Indicators database; and Eurostat.

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Policy context

• Central bank balance sheets remain enlarged

• Governments’ fiscal positions are weak

textPolicy cont

16

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Central bank balance sheets remain enlarged

Central bank liabilities

Policy

17 Source: Federal Reserve; Bank of Japan; European Central Bank; and Bank of England.

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Public finances have weakened significantly

General government balance, in per cent of GDP

Gross government debt, in per cent of GDP

Policy

18 Note: Data for 2009 are estimates for Japan.

Source: OECD, System of National Accounts database; and OECD Economic Outlook 87 database.

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If the slowdown is temporary, as implied by the

Appropriate policy responses?

balance of strengths and fragilities:

• Postpone the withdrawal of monetary support but maintain planned budget consolidation

• Automatic stabilisers should be allowed to work, market di i ll i

onses

conditions allowing

If the slowdown reflects longer‐lasting forces bearing down on activity:

• Additional monetary stimulus might be warranted in the

Policy respo

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form of QE and commitment to close‐to‐zero policy interest rates for a longer period