THE ECONOMIC, FINANCIAL AND SOCIAL SITUATION:
LATEST DEVELOPMENTS
I. THE GLOBAL OUTLOOK AND POLICY CONSIDERATIONS Recent developments and outlook
• The global economy is continuing to recover, but progress has become more hesitant.
Output and trade growth have softened since the early part of the year as the boost from fiscal support and other temporary factors have faded. Domestic demand remains solid in the non- OECD economies, but is more sluggish in the OECD economies. With monetary policies remaining accommodative even as fiscal consolidation becomes widespread, the present soft patch in output growth is not expected to persist for long, although, in the OECD economies at least, near-term growth appears unlikely to gain the momentum seen in earlier cyclical upturns.
• Risks remain substantial. A particular risk is that renewed declines in house prices in the United States, and the United Kingdom, would have a negative effect on household balance sheets, and slow consumption and raise saving rates. Clear adverse risks also persist in financial markets (see below). On the other hand, there is the possibility of a stronger recovery in equity markets, with shares being priced below historical norms amid elevated corporate profits. Another silver lining is that improved financial conditions could provide greater delayed stimulus to the economy than currently envisaged.
Policy considerations
• Planned budget consolidation should be pursued actively. Consolidation in the majority of countries in 2012 should be at least as sizable as in 2011 to avoid excessive debt accumulation and ensure continued credibility. In countries with more comfortable fiscal positions the underlying pace of consolidation could be softened. The automatic stabilisers should be allowed to operate around the planned consolidation path to offset any temporary weakness in activity, except in countries at acute risk of losing credibility.
• Exit from exceptional monetary policy stimulus must be guarded. With the current soft patch in growth, and sizeable fiscal consolidation now in prospect over the next two years, the normalisation of policy interest rates need not commence in most OECD economies until mid- 2011. Special liquidity facilities should be scaled down as conditions in inter-bank markets stabilise, but the sale of assets acquired by central banks during the crisis will have to be very gradual to avoid destabilising markets. If growth were to turn out weaker than expected, the normalisation of policy interest rates should be further delayed, and, depending on the duration of economic weakness, actions might be needed to lower interest rates further out in the maturity spectrum via additional quantitative easing and communications policies.
• Structural reforms need to be implemented to raise potential output in the long-term, thus facilitating fiscal consolidation, and to help tackle some of the specific legacies of the recession, such as weakness in labour markets and the scope for global imbalances to widen once more.
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II. FINANCIAL MARKETS: RECENT DEVELOPMENTS AND POLICY RESPONSES
• As legislators act – in the United States, Europe and elsewhere – the challenge of achieving global consistency of regulation becomes more pressing. Consistent global rules across financial markets – both geographically and across sectors – are essential to prevent regulatory arbitrage and business migration that will likely create new distortions and systemic risks. The OECD emphasises that financial ‘promises’ should be treated in the same way—wherever they are made and to wherever they are shifted—if we are to avoid crises in the future. The initial indications are that progress is very limited.
• The implementation of new capital rules has been significantly weakened following individual bank complaints and official objections especially in Europe. The current recently agreed rules may have the perverse effect of increasing incentives for new excess risk taking. The main problems are the different starting points of risk-weighted assets as a share of total assets for SIFI’s, the definition of capital, the absence of a leverage ratio and the change of heart on the netting of derivative exposures. This is problematic for preventing future financial crises and level playing field issues abound.
• The lack of liquid trading in the EU interbank market and the pricing of sovereign default in the bond markets of some countries, despite aggressive central bank liquidity policies, suggests that there is still work to be done to allay market concerns. The EU stress tests gave banks a two- year clean bill of health. But markets are also focused on what might happen in the period when government support packages are no longer in place.
• The probability of default priced into market spreads for sovereign debt in Europe is elevated for Greece, but also for Ireland and Portugal, though not Spain. Were market expectations to be borne out in restructuring measures post 2014, this does not involve any SIFI’s. Banks that would be exposed are the own-country banks of those with elevated spreads and some mainly state owned banks in large countries. The issue is a budget financing and capital markets issue, and not a systemic banking crisis issue.
• Balancing fiscal consolidation, dealing with substantial debt re-financings and managing the use of the European Financial Stability Facility without generating adverse market reactions will be important challenges going forward. But above all, markets have to be convinced that structural reforms will be pursued so as to rebalance competitiveness across EU regions.
III. LABOUR MARKET
The moderate pace of the economic recovery to date is reflected in broad stability in the OECD unemployment rate, at a level close to post-war highs.
• The OECD harmonised unemployment rate was 8.5% in August 2010. This is 0.1 percentage point lower than in July, but still close to its post-war high of 8.8% in October 2009, illustrating how the moderate pace of the economic recovery to date has been insufficient to significantly reduce the high levels of unemployment and underemployment that developed during the 2008- 09 recession.
• The 8.5% unemployment rate is equivalent to 45.5 million persons unemployed in August which, in turn, was 15.2 million more than the number of jobless persons at the onset of the crisis in December 2007 (figures omit 5 OECD countries for which comparable data are not available).
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• Seven OECD countries had double-digit unemployment rates in August: Spain (20.5%), Estonia (18.6% in June), the Slovak Republic (14.6%), Ireland (13.9%), Portugal (10.7%), Hungary (10.9%), and France (10.1%). The lowest rates were recorded in Norway (3.3% in July), Korea (3.4%), Austria (4.3%), Switzerland (4.4% in June) and the Netherlands (4.5%).
• September 2010 data are available for the United States, where the unemployment rate was 9.6%, unchanged since the previous month. Nonfarm payroll employment edged down in September.
Government employment declined (-159,000), reflecting both a drop in the number of temporary jobs for Census 2010 and job losses in local government, while private-sector payroll employment continued to trend up modestly (+64,000).
• Within the Euro area, unemployment has declined in recent months in Germany, but continued to increase in France, Greece and Spain.
Youth and low-skilled workers are at particular risk in a high-slack labour market
• Whereas overall employment in the OECD area was 1.3% lower in the second quarter of 2010 than 3 years earlier, employment for youth (15-24) fell 9.2%. This sharp deterioration in labour market opportunities for recent school leavers is 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 yet possible to assess how successful these measures have been in limiting
“scarring” effects.
• OECD organized a High-Level Policy Forum on the theme of Jobs for Youth in Oslo on 20-21 September. The Forum provided a timely opportunity to Ministers and High-Level officials to share experience on the effect of their different youth labour market and training programmes and identify good practices to facilitate the transition from school to work and career progression (for more detail, see www.oecd.org/employment/youth/forum).
• Employment losses have also been much larger for low-skilled workers (7.8%) than for medium-skilled workers (2.4%), while employment has actually grown by 6.5% for high-skilled workers. Employment losses have also been larger for men than for women.
Long-term unemployment has begun to increase sharply in a few countries, bringing with it the risks of hysteresis effects.
• Whereas unemployment surged in 2009, it was only in 2010 that the number of long-term unemployed began to rise sharply. To date, the rise in long-term unemployment has been strongly concentrated in a limited number of countries where the recession has hit labour markets particularly hard. For example, the share of all unemployed that have been jobless for a year or more rose from 9.4% in the United States in 2007Q2 to 30.1% in 2010Q2. Over the same period, Ireland saw an increase from 30.1% to 46.6% and Spain an increase from 21.2% to 35.9%.
However, in the context of weak job creation, the share of long-term unemployed is expected to increase in most OECD countries.
• The observed and expected increases in long-term unemployment are of particular concern because of the risk that many of the workers concerned could become structurally unemployed. In past recessions, this has been one of the main channels through which a cyclical
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increase in unemployment transformed into persistently high unemployment rates that took 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.
The medium-term outlook is for unemployment to recede slowly in most countries, raising questions about whether governments should take additional measures to support job creation and how long crisis measures should be retained
• OECD projections from May foresaw slowly falling unemployment with the average for the OECD area still above 8% at the end of 2011. The Interim Projections released on 9 September are even more pessimistic about the pace of the recovery in the second half of 2010, suggesting that even more time may be required to restore high employment rates.
• As labour markets gradually improve, it is important to assure that crisis measures to support workers are phased out in a timely fashion, especially in light of the overall need for fiscal consolidation. However, a delicate balancing act is required because it is also important not to withdraw worker supports prematurely. Many crisis measures are scheduled to expire this year and governments face difficult choices about whether to extend some of them.
• Some OECD governments are considering additional measures to strengthen job creation in the recovery. In some cases, there may be room for additional spending, such as the $50 billion initiative for investing in transportation infrastructure recently announced by the Obama Administration. Other governments are emphasizing structural labour market reforms as a way to encourage stronger and more sustainable employment growth. For example, Spain recently enacted a broad package of labour market reforms and the Mexican government has submitted to Congress a comprehensive labour code reform.
