22 November 2011 Room Document No. 1 THE ECONOMIC, FINANCIAL AND SOCIAL SITUATION:
LATEST DEVELOPMENTS I. THE GLOBAL OUTLOOK AND POLICY CONSIDERATIONS Uncertainties have mounted
• Uncertainties regarding the short-term economic outlook have risen dramatically in recent months. Even in the absence of disruptive events, heightened risk awareness weighs heavily on the outlook for the global economy. Business and consumer confidence have weakened, investment decisions are being postponed and household spending has come under pressure from lower equity prices, labour market slack and the persistent slump in housing markets.
• Growth is thus poised to remain subdued in the near term in the advanced economies and at below-trend rates in the most emerging market economies. A brighter outlook can materialise if the policy measures that were announced at the Euro Summit of 26 October are implemented promptly and forcefully. In the absence of this the outlook could be gloomier, with a disorderly sovereign debt event likely to occur.
Policy should aim to restore confidence
• An adequate resolution of the euro area crisis becomes more urgent by the day. To break the link between sovereign debt and banking distress, prevent the (further) spreading of the sovereign debt crisis to other European countries and secure appropriate short-term and longer-term funding for banks, the measures announced on 26 October must be clarified and implemented fully and decisively.
• Interest rates should remain on hold in the advanced economies or, where possible, be reduced, notably in the euro area. Further monetary relaxation, including through unconventional measures, would be warranted if downside risks intensify. In the emerging- market economies, the stance of monetary policy should be guided by the outlook for growth and inflation, which remain comparatively high.
• Strong, credible medium-term frameworks are needed to restore confidence in the sustainability of public finances and to build budgetary space to deal with short-term weakness.
Those advanced economies with sounder public financed can provide additional demand support. And, last but not least, structural reforms to boost the growth potential, tackle high unemployment and rebalance global demand are essential. Priority should be given to reforms that offer support to activity in the short term while facilitating longer-term fiscal consolidation.
• The measures announced at the EU summit of 26 October go in the direction of resolving the euro area sovereign debt and banking crisis. But whether the package goes far enough is unclear because much detail is missing. For instance, more information is needed specifically on the options for enhancement of the EFSF. The associated costs are large and resources to prevent contagion may have to be expanded by greater use of the ECB balance sheet, if
II. FINANCIAL MARKETS
The situation of the global crisis centred on Europe continues to be mismanaged and risks spreading back to the USA via CDS guarantees.
• The ECB is perfectly capable of putting a lid on Italian, French and Spanish bonds were it to choose to do so. It has not—it has allowed contagion to spread (affecting the cost of rolling debt, confidence and the value of securities on bank balance sheets at a time when the market is re- pricing risk).
• This has resulted in a pan EMU “sovereign run” as the market re-prices risk back to individual Eurozone countries (as it was before the euro).
It is a mistake to believe this is a sovereign crisis related to the build-up of debt to GDP ratios. The USA has the lowest bond yields in its history and yet it has a bigger sovereign debt problem than most large EU countries. The problems in Europe are fundamentally related to: (a) a monetary union without a central fiscal authority; (b) competitiveness issues that undermine growth; (c) liquidity problems in the absence of Eurobonds that stem from issues (a) and (b); and (d) a highly levered banking system that mixes capital market products and derivatives with standard banking functions and has no flexibility to deal with financial volatility resulting from the other issues.
It is clear that there is an urgent need of coherent policy now to prevent the sovereign run from accelerating.
Status Quo
• The IMF/EU loan facility and fiscal consolidation pressure.
• Eurosystem (Target 2) lending via the national central banks in the problem countries @ the low ECB re-financing rate.
Not yet Tried
• The Eurobond option & fiscal consolidation (But Germany pays higher rates).
• Increase the total resources of the IMF by a large amount via ECB loans &/or via the BRICS and the private sector loans: the IMF lends massively to Europe with conditionality. A very positive option.
• EFSF is levered to a large size with private & Chinese participation. But pushed too far, this undermines the credit ratings of guarantor countries.
• ECB SMP buying to keep a firm lid on rates of larger countries via QE policies. This is essential—
an agreement is required urgently to do this now.
• NOHC legislation to quarantine traditional banking from securities market activities.
III. LATEST DEVELOPMENTS IN THE LABOUR MARKET AND SOME POLICY CHALLENGES
1. The labour market recovery has stalled with the OECD unemployment rate still well above its pre-crisis level
• The OECD harmonised unemployment rate is estimated at 8.2% in September 2011 (see Table 1). This is down 0.6 percentage point from its post-war high of 8.8% in October 2009.
Despite two years of GDP growth, less than one-quarter of the sharp increase in the OECD unemployment rate between the December 2007 and October 2009 has been reversed (see Figure 1). Most of the total decline in unemployment since its peak occurred between November 2010 and February of this year, and it has remained little changed since.
• The 8.2% unemployment rate is equivalent to almost 44.8 million persons unemployed in the OECD area in September which, in turn, is 13.6 million more than the number of jobless persons immediately preceding the crisis.1
• In September 2011, six OECD countries had double-digit unemployment rates, even as unemployment was below 5% in seven other countries.
• The highest unemployment rates in September were found in: Spain (22.6%), Greece (17.6%, July), Ireland (14.2%), the Slovak Republic (13.5%), Estonia (12.8%, second quarter), Portugal (12.5%) and Hungary (9.9%). The lowest rates were recorded in Korea (3.2%), Norway (3.2%, July), Switzerland (3.4%, second quarter), Austria (3.9%), Japan (4.1%), the Netherlands (4.5%) and Luxembourg (4.8%).
• The October unemployment rate in the United States was 9.0%. After declining steadily from 9.8 in November to 8.8% in March, job creation has slowed markedly in recent months leaving the unemployment rate hovering around 9%. While the recent weakness in private sector hiring in the United States should be transitory, it will take several years of sustained job creation to bring the US unemployment rate back to the 5-6% level seen before the Great Recession.
• The UK unemployment rate rose sharply in Q3 2011 to 8.3%, its highest level since 1996.
2. Youth and low-skilled workers are at particular risk in a high-slack labour market
• Whereas overall employment in the OECD area was 1.5% lower in the second quarter of 2011 than 3 years earlier, employment for youth (15-24) fell 8.8% (see Figure 2). This sharp deterioration in labour market opportunities for recent school leavers contrasts sharply with the 7.2% rise in employment for older workers (55-64). Large employment losses for youth are of particular concern because unemployment and other labour market difficulties encountered early in their working lives can jeopardise long-term career prospects. OECD governments have implemented a number of crisis measures intended to help youth to weather the economic storm, both by providing additional opportunities for education and training, and by helping young workers to gain valuable work experience. However, it is not possible yet to assess how successful these measures have been in limiting “scarring” effects.
• Employment losses have also been much larger for low-skilled workers (6.7%) than for medium-
3. Long-term unemployment has increased sharply in a few countries, bringing with it the risk of hysteresis effects and concerns about the adequacy of income support for the long-term jobless
• Whereas unemployment surged in 2009, it was only in 2010 that the number of long-term unemployed began to rise as many of the workers who had lost their job during the contraction found it difficult to get another one even during the economic recovery due to the weak job creation. By the second quarter of 2011, the share of unemployed who had been jobless for at least a year had risen above the pre-crisis level in more than two-thirds of OECD countries, with the rise in long-term unemployment being greatest in those countries where the recession has hit labour markets particularly hard (see Figure 3). For example, the share of all unemployed that have been jobless for a year or more rose from 9.8% in the United States in 2008 Q2 to 31.9% in 2011 Q2, a postwar high. Over the same period, Spain recorded an increase from 17.6
% to 40.9%, Ireland an increase from 29.2% to 57.6%, and the share of long-term unemployed in Iceland soared from 5.0% to 31.0%.
• These large increases in long-term unemployment are of particular concern because of the elevated risk that such workers become structurally unemployed. In past recessions, this has been one of the main channels through which a cyclical increase in unemployment transformed into persistently high unemployment rates that took many years to unwind. Long-term unemployment is also associated with elevated risks of poverty, health problems and school failure for children of the affected workers.
• A closely related concern is that some of the countries where long-term unemployment has grown most sharply spent relatively little on active labour market programmes (ALMPs) prior to the crisis. These countries are likely to have encountered particular difficulties in scaling up back-to-work measures for the rapidly growing numbers of workers facing severe labour market difficulties. Indeed, three of the six countries where the increase in long-term unemployment exceeded 2% of the labour force spent substantially less than the OECD average on ALMPs in 2009 (see Figure 4).
• The adequacy of income support for the long-term unemployed is also of concern, as increasing numbers of job losers exhaust their entitlement to “first-tier” unemployment benefits and many new labour market entrants, who typically do not qualify for unemployment benefits, experience a long period of joblessness. New OECD analysis shows that enrolment in unemployment benefits increased rapidly during the recession, when unemployment surged.
Extensions of the maximum benefit period played an important role in expanding income support for the growing numbers of long-term unemployed persons in several countries, notably the United States. By contrast, the last tier of income assistance generally has not been nearly as responsive to deteriorating labour market conditions. Social assistance programmes are primarily designed to serve disadvantaged populations and they may need to be adjusted so as also to serve as an effective backstop to unemployment benefits when long-term unemployment increases sharply during a deep recession.
Figure 1. The labour market impact of the crisis and early recovery periods has been uneven across countries
Unemployment rate before the crisis, at its peak and its latest valuea
0 5 10 15 20 25
NOR KOR NLD CHE AUT JPN* LUX AUS MEX NZL DNK CZE ISR* DEU GBR SVN BEL CAN ISL ITA FIN SWE POL USA FRA CHL HUN PRT TUR IRL SVK GRC EST ESP OECD G7 Euro area EU-27
% Pre-crisis trough Peak Latest
*: The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law.
From March 2011 to August 2011, the results for Japan excludes three prefectures (Iwate, Miyagi and Fukushima) struck by the Great East Japan Earthquake, where the survey operation was suspended.
Countries are shown in ascending order by the unemployment rate at its peak.
a) Trough dates are defined as the start of the longest spell of consecutive increase of the quarterly OECD harmonised unemployment rates (seasonally adjusted) during the period from 2006 Q1 until 2011 Q3.
Source: OECD calculations based on OECD Main Economic Indicators Database.
Figure 2. Falling employment has particularly affected youth, low-skilled and men
Percentage change in employment, 2008 Q2 - 2011 Q2
-1.5
-2.3
-0.6
-8.8
-1.9
7.2
-6.7 Both sexes
Men
Women
Youth (15-24)
Prime-age (25-54)
Old-age (55-64)
Low-skilled
GenderAge groupsn
Figure 3. Long-term unemployment has risen in most countries, but sharp hikes are confined to only a few, second quarters of 2008 and 2011
Long-term unemployed (more than one year) as a percentage of total unemploymenta
0 10 20 30 40 50 60 70 80
MEX NZL CAN SWE FIN AUS ISR NOR TUR AUT DNK ISL USA GBR JPN NLD LUX POL CZE ESP FRA SVN BEL DEU GRC HUN PRT ITA EST IRL SVK OECD G7 Euro area EU-27
% 2008 Q2 2011 Q2
Countries are shown in ascending order of the incidence of long-term unemployment in 2011 Q2.
a) Data are not seasonally adjusted. OECD is the weighted average of 32 OECD countries excluding Chile and Korea. Data shown for Israel and Mexico correspond to 2007 Q4 and 2010 Q4.
Source: OECD estimates based on national Labour Force Surveys.
Figure 4. Some of the hardest-hit countries were low spenders on active labour market programmes before the crisisa,b
-0.4 -0.2 0 0.2 0.4 0.6 0.8 1 1.2 1.4 1.6
-2 -1 0 1 2 3 4 5 6 7 8
%
Increase of long-term unemployment (% of total labour force) Left-hand scale
2009 spending on active measures (% of GDP) Right-hand scale
Note: Countries are shown in ascending order by the increase in long-term unemployment rate.
a) Increase of long-term unemployment corresponds to the percentage-point increase from 2007 Q4 to the latest data (usually 2011 Q2) of person unemployed a year or longer as a percentage of the labour force.
b) Active spending for Greece excludes spending on Public Employment Services (PES). For Norway and New Zealand, spending on active measures refer to 2007 instead of 2009.
Source: Source: OECD calculations based on national Labour Force Surveys for long-term unemployment and OECD Labour Market Programmes Database for spending.
Changes in harmonised unemployment since December 2007a,b
Dec 2007 Sep 2011 %-point
change % change Dec 2007 Sep 2011 Absolute
change % change
OECD-34c 5.6 8.0 2.4 43.4 32 871 47 337 14 466 44.0
OECD (Official) 5.7 8.2 2.5 43.9 31 137 44 759 13 621 43.7
G7 5.5 7.6 2.1 38.2 20 133 27 944 7 812 38.8
European Union 7.0 9.7 2.7 38.6 16 539 23 264 6 725 40.7
Euro Area 7.5 10.2 2.7 36.0 11 619 16 198 4 579 39.4
OECD Europe 6.9 9.5 2.6 37.7 17 808 24 374 6 566 36.9
Australia 4.3 5.2 0.9 20.9 484 634 150 31.1
Austria 4.0 3.9 -0.1 -2.5 170 167 -3 -1.8
Belgium 7.2 6.7 -0.5 -6.9 342 330 -12 -3.5
Canada 6.0 7.1 1.1 18.3 1 081 1 334 254 23.5
Chile 7.9 7.2 -0.7 -8.9 564 590 26 4.6
Czech Republic 4.8 6.6 1.8 37.5 252 348 96 38.1
Denmark 3.3 7.1 3.8 115.2 96 205 109 113.5
Estonia 4.1 12.8 8.7 212.2 28 89 61 217.9
Finland 6.5 7.8 1.3 20.0 175 208 33 18.9
France 7.8 9.9 2.1 26.9 2 217 2 880 663 29.9
Germany 8.2 5.8 -2.4 -29.3 3 409 2 443 -966 -28.3
Greece 7.9 17.6 9.7 122.8 386 874 488 126.4
Hungary 8.0 9.9 1.9 23.7 338 421 83 24.6
Iceland 2.2 7.2 5.0 227.3 4 13 9 219.5
Ireland 4.9 14.2 9.3 189.8 110 297 187 170.0
Israeld 6.7 5.5 -1.2 -17.9 196 175 -21 -10.8
Italy 6.7 8.3 1.6 23.9 1 683 2 080 397 23.6
Japane 3.8 4.1 0.3 7.9 2 510 2 670 160 6.4
Korea 3.1 3.2 0.1 3.2 753 807 54 7.2
Luxembourg 4.2 4.8 0.6 14.3 9 11 2 22.2
Mexico 3.8 5.3 1.5 39.5 . . . . . . . .
Netherlands 3.3 4.5 1.2 36.4 283 398 115 40.6
New Zealand 3.4 6.6 3.2 94.1 78 157 79 101.3
Norway 2.5 3.2 0.7 28.0 63 83 20 31.7
Poland 8.3 9.4 1.1 13.3 1 409 1 668 259 18.4
Portugal 8.5 12.5 4.0 47.1 471 685 214 45.4
Slovak Republic 10.4 13.5 3.1 29.8 279 367 88 31.5
Slovenia 4.7 8.0 3.3 70.2 48 80 32 66.7
Spain 8.8 22.6 13.8 156.8 1 984 5 258 3 274 165.0
Sweden 6.0 7.2 1.2 20.0 290 363 73 25.2
Switzerland 3.2 3.4 0.2 6.3 151 167 16 10.5
Turkey 9.0 9.0 0.0 0.0 2 042 2 394 352 17.2
United Kingdom 5.1 8.1 3.0 58.8 1 569 2 545 976 62.2
United States 5.0 9.1 4.1 82.0 7 664 13 992 6 328 82.6
Harmonised unemployment rate Percentage of the labour force
Harmonised unemployment level In thousands
. . : Not available.
a) Last month available: July 2011 for Greece, Norway, Turkey and the United Kingdom; August 2011 for Chile; 2011 Q2 for Estonia, Israel and Switzerland; 2011 Q3 for Iceland and New Zealand (OECD harmonised unemployment rate data are not available on a monthly basis for the last five of these countries).
b) Harmonised unemployment data for Estonia, Iceland, Israel, New Zealand and Switzerland are not available on a quarterly basis but for comparison purposes the quarterly averages are reported on a monthly basis. December 2007 corresponds to 2007 Q4 for those countries.
