Recent economic developments and the near- term economic outlook

Recent economic

developments and the near- term economic outlook

Council

19 September 2013 Jorgen Elmeskov

Deputy Chief Economist

Council

19 September 2013

The recovery in world trade remains sluggish

Index, 2005 = 100

Global merchandise trade volumes

Source: CPB.

80 90 100 110 120 130 140

80 90 100 110 120 130 140

The composition of global momentum has changed

3‐month moving average, annualised percentage change

Industrial production growth has picked up in advanced countries but  slowed in emerging economies

1. The series are seasonally and working-day adjusted.

Note: The values for Emerging Economies are a weighted average of those for Brazil, China, India, Indonesia, the Russian Federation and South Africa, where weights are nominal GDP, measured at PPP 2005 USD.

Source: OECD Economic Outlook 93 database; OECD Main Economic Indicators database;

national statistical agencies; and OECD calculations.

-10 -5 0 5 10 15 20

-10 -5 0 5 10 15 20

2011m1 2011m7 2012m1 2012m7 2013m1

G7 Emerging Economies

Forward-looking indicators have improved in advanced economies

1. Levels above 50 signal expansion.

Source: ISM; Markit Economics Limited; National Bureau of Statistics, China.

Business surveys are pointing to stronger growth in  major advanced economies

Manufacturing PMI indicators, index level

40 50 60

40 50 60

United States Euro area Japan China

Recent higher growth rates for the major advanced countries should be maintained in

the rest of 2013

G7 real GDP

Annualised quarter‐on‐quarter change, per cent

Note: Figures for the 3^rdand 4^thquarters of 2013 are based on the OECD’s indicator model.

Source: OECD Main Economic Indicators; OECD indicator-based forecast.

-0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0

-0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0

2012q3 2012q4 2013q1 2013q2 2013q3 2013q4

OECD interim forecasts

1. Based on GDP releases and high-frequency indicators published by 2 September; seasonally and in some cases working-day adjusted.

2. Annual growth numbers for 2013 are derived by applying the indicator model forecasts for the third and fourth quarters to the outcome for the first two quarters.

3. Weighted average of Germany, France and Italy.

4. The indicator model forecasts for Q3 and Q4 2013 have been adjusted for the impact of the floods in Alberta and strikes in Quebec in June, based in part on estimates in the Bank of Canada's July Monetary Policy Report.

Source: OECD Interim Forecast.

Indicator‐based forecasts for GDP in the major economies

b 2012

Implied

2013² 2012Q4 2013Q1 2013Q2 2013Q3 2013Q4 (Average annual

percentage change) (Annualised quarter-on-quarter percentage change)

United States 2.8 1.7 0.1 1.1 2.5 2.5 2.7

China 7.8 7.4 7.8 6.6 7.0 7.2 8.1

Japan 2.0 1.9 1.0 4.1 3.8 2.6 2.4

Germany 0.9 0.7 -1.8 0.0 2.9 2.3 2.4

France 0.0 0.3 -0.7 -0.6 1.9 1.4 1.6

Italy -2.4 -1.8 -3.7 -2.2 -1.0 -0.4 -0.3

3 largest euro area countries³ -0.2 0.0 -2.0 -0.7 1.6 1.3 1.4

UK 0.2 1.7 -0.9 1.1 2.9 3.7 3.2

Canada⁴ 1.7 [2.0] 0.9 2.2 1.7 [4.8] [2.5]

Divergent growth performance has been reflected in labour market outcomes

Source: OECD calculations based on the OECD Short-term Labour Market Statistics Database and national labour force surveys.

Unemployment rate

Per cent of the labour force

2 4 6 8 10 12 14

United States Euro area Japan

Emerging economies have recently suffered a sharp reversal in capital flows

1. EPFR Global data give a partial sample of total inflows and outflows.

Source: EPFR Global.

Indicator of net flows

Billions of US dollars

-15 -10 -5 0 5 10 15

-15 -10 -5 0 5 10 15

Equity funds Bond funds Total

Emerging economies with large current account deficits have tended to experience the most

exchange rate pressure in recent months

1. Trailing 4 quarters, as per cent of GDP.

Source: Datastream; OECD Economic Outlook 93 database.

Recent exchange rate movements and current  account balances among emerging economies

Brazil

China

India

Indonesia

South Africa

Argentina

Turkey

Chile Russia

Poland Mexico

-8 -6 -4 -2 0 2 4

-20 -15 -10 -5 0 5

Percentage change in nominal effective exchange rate since May 16 Current account balance¹

Estimated and projected potential output

Average annual percentage change

Trend growth is declining in emerging economies

0 1 2 3 4 5 6 7 8

0 1 2 3 4 5 6 7 8

2000-2007 2008-2012 2013-2020

OECD non OECD

Source: OECD Economic Outlook 93 long-term database.

China’s share of investment in GDP will fall with trend growth, and other demand components need to take up the slack.

Declining trend growth will require structural rebalancing in China

Source: OECD national accounts database; Datastream.

South Africa Australia Canada France

Germany

India

Portugal

Indonesia

Euro area Italy

Japan

Mexico Spain

Korea

Turkey

UK

USA Brazil

Russia

China

10 15 20 25 30 35 40 45 50

-2 0 2 4 6 8 10

Fixed investment/GDP,

per cent

Average annual GDP growth rate, per cent

Investment‐to‐GDP ratio and GDP growth, 2010‐2012

Reform responsiveness since 2011 has been lower in the BRIICS

Responsiveness rate (%) to Going for Growth recommendations , 2011‐12 

There has been a loss of momentum in structural reform in emerging economies

0.0 0.2 0.4 0.6

0 0.2 0.4 0.6

BRIICS OECD

Note: The reform responsiveness rate indicator based on a scoring system, which takes a value of one if significant action is taken reflecting the recommendations set in Going for Growth (2012), and zero otherwise.

Source: OECD Going for Growth 2013.

• Underlying weaknesses in EMEs may be exposed by capital outflows and financial market pressures.

• Fiscal brinksmanship in the United States could undermine confidence and lead to financial market turbulence.

• In the euro area, banking union is still far from

complete and many banks remain weakly capitalised.

Risks

In the advanced economies, inflation generally remains very low.

Monetary policy requirements

-2 -1 0 1 2 3

-2 -1 0 1 2 3

United States Euro area Japan

Core inflation

12‐month percentage change in core consumer price index

1. For the United States and Japan, core index is CPI excluding energy and food, for the euro area HICP excluding food, energy, alcohol and tobacco.

Source: OECD Main Economic Indicators database; OECD calculations

Economic slack, low inflation and tighter monetary conditions (via higher bond yields) in many advanced economies monetary policy should remain expansionary (though tapering of QE in the US should begin soon, as expected).

More diverse situation in EMEs.

• China: low inflation provides scope to ease if needed, but strong credit growth suggests the need for caution.

• Dilemmas for some other EMEs.

• Weak credibility, inflation already high and currency under pressure need to tighten despite weaker activity.

• Strong credibility central banks can look through inflationary impulses coming from currency

weakness.

Monetary policy requirements

(continued)

In the United States and the euro area budget outcomes have improved.

Fiscal policy requirements

General government balance

Per cent of GDP 

Note: Economic Outlook 93 projections for 2013.

Source: OECD National Accounts Database; OECD Economic Outlook 93 database.

-14 -12 -10 -8 -6 -4 -2 0

2007 2008 2009 2010 2011 2012 2013

United States Euro area Japan

• Further consolidation is warranted in the US, but at a more gradual pace than this year.

• Euro area countries should pursue planned structural consolidation in 2014 and allow automatic stabilisers to play.

• In Japan the planned VAT hike should take place, but some temporary and partial offset could be introduced if necessary.

Fiscal policy requirements

(continued)

Structural reform efforts are needed to:

• Avoid hysteresis in labour markets and increase employment;

• Boost growth;

• Facilitate rebalancing.

Structural policy requirements

• Still sluggish global growth

• Improvements among advanced economies, slowdowns for many emerging economies

• Policy efforts needed to achieve a stronger global recovery and address risks

Summing up