16 February 2012 Room Document No. 1
THE ECONOMIC, FINANCIAL AND SOCIAL SITUATION:
LATEST DEVELOPMENTS
I. THE GLOBAL OUTLOOK AND POLICY CONSIDERATIONS Near-term economic prospects
Although the global slowdown seems to be moderating, it has not run its course yet. The euro area is headed for a shallow recession prompted by the enduring sovereign debt crisis. In the United States, despite some recent surprises on the upside, underlying weakness is persisting, with sluggish income growth, weak consumer sentiment, negative equity positions among home owners, impaired mortgage markets and the fiscal policy stalemate weighing on the outlook. In Japan, where activity has been buoyed by reconstruction work and the rapid restoration of supply chains following the earthquake and tsunami early last year, indicators have been weakening. Emerging markets are also showing signs of a slowdown. While domestic factors account for some of this slowdown, world trade has also plateaued suggesting that external demand is also playing a role. Spill-over effects from the euro area debt crisis are now being felt in Eastern Europe, as a credit crunch associated with deleveraging of European banks is having an impact.
The risks to the outlook are still predominantly to the downside. Given that the financial system is still fragile and with the economy weakening, a systemic credit event in the euro area is still possible and would be particularly disruptive. A possible collapse of (already weak) confidence in the ability of the authorities to address the sovereign debt crisis in the euro area might remain a possibility. More generally, more economies risk being drawn into a “bad equilibrium” in which soaring yield spreads prompt painful fiscal austerity amid plummeting activity, and while the focus is currently on the euro- area periphery, the risk of such a scenario is potentially more widespread. Hence, the pay-off for policy makers taking the right actions is very large. Fortunately there are little if any incipient signs of an asset price bubble bursting in emerging market economies, though except possibly in China.
Policy requirements
Euro area: The ECB’s three-year long-term refinancing operation launched last December has helped to overcome the acute funding difficulties confronting banks in Europe, and is providing some indirect support to sovereigns, notably in Italy and Spain. However, the negotiations on private sector involvement (PSI) to reduce Greek sovereign debt are still ongoing. The sovereign debt situation in Portugal also looks worrisome. Official support to sovereigns and banks, though extremely welcome, can only provide temporary relief. A permanent solution requires the adoption and implementation of structural reforms aimed at fostering a rebalancing of intra-area current accounts, generating stronger growth, creating more fiscal space and reducing financial market tensions. On the other hand, the pace of fiscal consolidation, although extremely urgent, needs to be aligned with countries’ fiscal space and economic strength.
United States: The euro area sovereign debt turmoil also remains a cause of concern in the United States, as the financial sector is highly exposed to developments in European financial institutions, which in turn are highly exposed to their nation’s sovereign debt. With regard to fiscal policy, the withdrawal of fiscal support will probably exert only a mild restrictive effect on GDP this year, although fiscal policy would have a much more restrictive effect if Congress does not approve further fiscal stimulus measures, notably the extension of payroll tax cuts and unemployment benefits (which, taken together, should boost GDP growth by more than a percentage point). Regarding monetary policy, the Federal Reserve clearly intends to retain its accommodative policy stance while the economy remains weak and stands ready to act further if needed. In a significant step toward increasing transparency, the Federal Reserve
us also reported recently that the policy committee will begin publishing its projections for the appropriate level of the funds rate in the fourth quarter of the current year and in the next few years, as well as information about the likely timing of the first rate hike given economic prospects. These projections will be released starting with the January meeting.
Japan: In the beginning of January, the government announced a (much needed) draft tax and social security reform plan that includes doubling the consumption tax rate to 10% to address rising social spending due to population aging and to achieve fiscal sustainability. The government hopes to win approval from the opposition parties and submit relevant bills to the Diet by the end of March. However, there is strong political opposition from both the ruling Democratic Party of Japan (DPJ) and major opposition parties.
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II. FINANCIAL MARKETS
Financial Market Issues February 2012
The financial and sovereign debt crises have reached an interesting juncture. All Western central banks (US, Europe and Japan) are promoting extremely easy monetary policy and quantitative easing as and when required, while Greece has signed an extreme fiscal consolidation package to receive its next tranche of troika assistance. This has led to some movements in key spreads. Following policies in late 2011, EU bank CDS spreads have pulled back from the brink. Greek sovereign spreads show no signs of improvement, but there has been some modest decoupling of other periphery countries, most importantly in Portugal.
Signs of deleveraging and a credit crunch are only apparent in the EU periphery countries. Elsewhere money and credit are surprisingly resilient, notably in the USA and in larger EU countries. Asia is trying to control importing money and capital from the west due to its managed exchange rate regime. China is having the most success in trying to deal with its asset price and goods price inflation problems. There is a significant risk here—slowing demand and imports affects OECD prospects to some extent, but if there is a recession in Europe which is worse than expected, then global factors could surprise the Chinese authorities as it did in 2008. India appears to be having much greater difficulty in dealing with bubble factors in its economy and the credit multiplier has moved upwards.
There is no evidence to date that reduced trade finance from the West (especially Europe) causes weak exports—as opposed to causality running the other way (weak exports reduces the global demand for trade finance).
The main problem in the global financial system remains a critical shortage of collateral for the trading and clearing of derivatives with systemically important financial institutions (SIFIs). This problem is being exacerbated by regulatory reform, given the explosive growth of derivatives and the inability of regulators to deal with what banks do via Vickers-style reforms. This reform is essential, even if most countries don't yet recognise this.
• The size of the derivatives and repo markets has already led to a shortage of cash and AAA sovereign collateral. Re-hypothecation has been spreading counterparty risk.
• The move to clearing will require billions of more collateral.
• Quality collateral will increasingly be tied up in the ill-conceived liquidity rules of Basel.
This is why central banks and clearing houses are reducing the quality of collateral they will accept, even towards accepting corporate bonds. This explains the LTRO policy—it provides cash for margin calls, and encourages banks to become buyers of Italian and Spanish sovereign debt to pledge as 3-year collateral to the ECB to obtain the precious cash they need. What does it all mean?
• The system is more dependent on central bank money printing to avoid crises.
• As it goes on the system will be more vulnerable to shocks—calls for collateral will be exacerbated by lower quality collateral correlation with risk, resulting in haircuts and over-collateralisation demands.
• Banks will build more exposure to problematic sovereign bonds.
It remains that Vickers-style reform in Europe and the US is easily the most important requirement for getting the global financial system into a state that can support sustainable growth.
The other major and increasingly critical issue is the Target 2 system in Europe, where banks like the Bundesbank are increasingly holding claims in the Eurosytem on central banks that are not assured of remaining within the euro.
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
o The OECD harmonised unemployment rate is estimated at 8.2% in December 2011 (see Table 1).
This is down 0.6 percentage point from its post-war high of 8.8% in October 2009. Despite more than 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). After declining in late 2009 and during 2010, unemployment has remained little changed since, as the pace of the economic recovery has flagged.
o The 8.2% unemployment rate is equivalent to almost 44.6 million persons unemployed in the OECD area in September which, in turn, is 13.5 million more than the number of jobless persons immediately preceding the crisis.1
o The extent to which the contraction in output during the global crisis translated into job losses and rising unemployment differed strikingly across countries. Large differences persist despite more than two years of recovery in GDP. This reflects the slowness of stop-and-go output growth to translate into job creation in many countries and the absence of any clear tendency for the worst-hit labour markets to benefit from a stronger bounce-back in employment (see Figure 1). In the most recent data available, seven OECD countries have double-digit unemployment rates, even as unemployment was below 5% in six other countries.
o The highest unemployment rates in November were found in: Spain (22.9%), Greece (19.2%, October), Ireland (14.5%), Portugal (13.6%), the Slovak Republic (13.4%), Estonia (11.3%, fourth quarter), and Hungary (10.9%). The lowest rates were recorded in Korea (3.1%), Norway (3.3%, October), Switzerland (4.0%, fourth quarter), Austria (4.1%), Japan (4.6%) and the Netherlands (4.9%).
o The January 2012 unemployment rate in the United States was 8.3%. Nearly one-half of the drop of the 1.7 percentage-points in the unemployment rate since its peak at 10% in October 2010 occurred during the last five months, suggesting that labour market recovery is building momentum. Private sector job creation has also strengthen recently, averaging 229 000 per month since September 2011. However, even if private sector job creation continues at this faster pace, 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.
2. Youth and low-skilled workers are at particular risk in a high-slack labour market
o Whereas overall employment in the OECD area was 0.7% lower in the third quarter of 2011 than four years earlier, employment for youth (15-24) fell 9.2% (see Figure 2). This sharp deterioration in labour market opportunities for recent school leavers contrasts sharply with the 10.7% rise in employment for older workers (55-64).
o The proportion of youth who are not in employment or education and training (the NEET rate) has also risen during the crisis in most countries (see Figure 3). Between 2007 Q1 and 2011 Q1, particularly sharp rises occurred in Belgium, Ireland, Italy, Greece and Spain, where between 16 and 20 percent of youth are NEETs.
o 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
1. The figures cited in the text are official OECD figures that exclude Mexico due to the non-availability of monthly harmonised data on the level of unemployment for this country. Unofficial estimates that include Mexico raise the total number unemployed in the OECD area to 47 million persons in September 2011, up 14.2 million persons since December 2007.
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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.
o Employment losses have also been much larger for low-skilled workers (7.4%) than for medium- skilled workers (2.7%), while employment has actually grown by 9.3% for high-skilled workers (Figure 2). Employment losses have also been larger for men than for women.
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
o 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 third 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 4). For example, the share of all unemployed that have been jobless for a year or more rose from 9.9% in the United States in 2007 Q3 to 31.8% in 2011 Q3, a postwar high. Over the same period, Spain recorded an increase from 19.1% to 41.5%, Ireland saw an increase from 29.6% to 59% and the share of long-term unemployed in Iceland soared from 7.1% to 30.1%.
o 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.
o 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 five 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 5).
o 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 CHE NLD AUT JPN LUX AUS MEX NZL CZE DNK DEU ISR* SVN GBR ISL BEL CAN ITA FIN SWE POL USA FRA CHL HUN TUR PRT 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.
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 Q4.
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, 2007 Q3 - 2011 Q3 -0.7
-1.7
0.6
-9.2
-1.3
10.7
-7.4
-2.7
9.3
-14 -12 -10 -8 -6 -4 -2 0 2 4 6 8 10 12 14 Both sexes
Men
Women
Youth (15-24)
Prime-age (25-54)
Old-age (55-64)
Low-skilled
Medium-skilled
High-skilled
GenderAge groupsEducation
%
Data are not seasonally adjusted. Weighted average of all OECD countries excluding Chile (and Australia, Japan and New Zealand for the employment by educational attainment).
Source: OECD estimates based on national Labour Force Surveys.
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Figure 3. NEET rates evolution across OECD countries, 2007-2011
0 5 10 15 20 25 30 35 40
NLD DNK ISL CHE SWE AUT SVN LUX FIN CAN NOR DEU CZE EST POL AUS EU21 FRA OECD PRT GBR HUN USA SVK BEL IRL ESP GRC ITA MEX TUR
% 2007Q1 2011Q1
Note: 2007 Q4-2010 Q4 for Canada and Mexico. 2007 Q2-2011 Q2 for Australia. OECD and EU refer to unweighted averages.
Source: OECD estimates based on national labour force surveys.
Figure 4. Long-term unemployment has risen in most countries, but sharp hikes are confined to only a few, third quarters of 2007 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 AUS ISR DNK TUR FIN AUT NOR LUX ISL USA GBR NLD POL JPN CZE ESP FRA SVN PRT HUN DEU BEL GRC ITA EST IRL SVK OECD G7 Euro area EU-27
% 2007 Q3 2011 Q3
Countries are shown in ascending order of the incidence of long-term unemployment in 2011 Q3.
a) Data are not seasonally adjusted. OECD is the weighted average of 32 OECD countries excluding Chile and Korea.
Source: OECD estimates based on national Labour Force Surveys.
Figure 5. 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 Q3) 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. For the US, data on active spending refer to 2009-10.
Source: OECD calculations based on national Labour Force Surveys for long-term unemployment and OECD Labour Market Programmes Database for spending
.
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Table 1. Changes in harmonised unemployment since December 2007 a,b
Dec 2007 Dec 2011 %-point
change % change Dec 2007 Dec 2011 Absolute
change % change
OECD-34c 5.6 7.9 2.4 42.8 32 815 47 032 14 217 43.3
OECD (Official) 5.7 8.2 2.5 43.9 31 081 44 555 13 475 43.4
G7 5.5 7.5 2.0 36.4 20 069 27 605 7 536 37.6
European Union 7.0 9.9 2.9 41.4 16 494 23 816 7 322 44.4
Euro Area 7.4 10.4 3.0 40.5 11 578 16 469 4 891 42.2
OECD Europe 6.9 9.7 2.8 40.6 17 771 24 773 7 002 39.4
Australia 4.3 5.2 0.9 20.9 483 630 147 30.4
Austria 4.1 4.1 0.0 0.0 171 177 6 3.5
Belgium 7.2 7.2 0.0 0.0 342 346 4 1.2
Canada 6.0 7.5 1.5 25.0 1 081 1 400 319 29.5
Chile 7.9 7.1 -0.8 -10.1 564 571 7 1.2
Czech Republic 4.8 6.8 2.0 41.7 252 359 107 42.5
Denmark 3.3 7.8 4.5 136.4 96 229 133 138.5
Estonia 4.1 11.3 7.2 175.6 28 79 51 182.1
Finland 6.5 7.6 1.1 16.9 175 202 27 15.4
France 7.7 9.9 2.2 28.6 2 215 2 883 668 30.2
Germany 8.2 5.5 -2.7 -32.9 3 410 2 327 -1 083 -31.8
Greece 7.9 19.2 11.3 143.0 386 953 567 146.9
Hungary 8.0 10.9 2.9 36.2 338 467 129 38.2
Iceland 2.1 6.7 4.6 219.0 4 12 8 198.1
Ireland 4.9 14.5 9.6 195.9 110 300 190 172.7
Israeld 6.7 5.6 -1.1 -16.4 196 179 -17 -8.8
Italy 6.5 8.9 2.4 36.9 1 641 2 243 602 36.7
Japan 3.8 4.6 0.8 21.1 2 510 2 990 480 19.1
Korea 3.1 3.1 0.0 0.0 753 772 19 2.6
Luxembourg 4.2 5.2 1.0 23.8 9 12 3 33.3
Mexico 3.8 5.0 1.2 31.6 . . . . . . . .
Netherlands 3.3 4.9 1.6 48.5 283 431 148 52.3
New Zealand 3.4 6.6 3.2 94.1 78 157 79 101.3
Norway 2.5 3.3 0.8 32.0 63 89 26 41.3
Poland 8.3 9.9 1.6 19.3 1 408 1 770 362 25.7
Portugal 8.5 13.6 5.1 60.0 470 741 271 57.7
Slovak Republic 10.4 13.4 3.0 28.8 279 366 87 31.2
Slovenia 4.7 8.2 3.5 74.5 49 83 34 69.4
Spain 8.8 22.9 14.1 160.2 1 984 5 274 3 290 165.8
Sweden 6.0 7.5 1.5 25.0 290 376 86 29.7
Switzerland 3.2 4.0 0.8 25.0 151 195 44 29.5
Turkey 9.0 8.3 -0.7 -7.8 2 050 2 195 145 7.1
United Kingdom 5.1 8.4 3.3 64.7 1 567 2 665 1 098 70.1
United States 5.0 8.5 3.5 70.0 7 645 13 097 5 452 71.3
Harmonised unemployment rate Percentage of the labour force
Harmonised unemployment level In thousands
. . : Not available.
a) September 2011 for Turkey; October 2011 for Greece, Norway and the United Kingdom; November 2011 for Chile; 2011 Q3 for Estonia, Israel, New Zealand and Switzerland; 2011 Q4 for Iceland (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 monthly basis.
For comparison purposes, the quarterly averages are reported on a monthly basis (e.g. December 2007 corresponds to 2007 Q4 for those countries).
c) OECD-34 is an estimate (for internal use only) of the harmonised unemployment level including Mexico for which the harmonised unemployment level is only available on an annual basis.
d) 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.
Source: OECD Main Economic Indicators.
