20 October 2011 Room Document No. 1
THE ECONOMIC, FINANCIAL AND SOCIAL SITUATION:
LATEST DEVELOPMENTS
I. THE GLOBAL OUTLOOK AND POLICY CONSIDERATIONS The global economy has slowed
• The recovery has almost come to a halt in the OECD area, despite a short-lived rebound from the global supply chain disruption that followed the earthquake and tsunami in Japan. Growth has also softened in the large emerging-market economies outside the OECD area. Slow growth is sapping the dynamism of international trade. Unemployment remains high in many countries.
• A generalised loss in confidence among businesses and consumers has heightened risk awareness.
This collapse in confidence will likely weigh on the outlook in the near term.
• Global imbalances remain wide. While the Chinese current account surplus is falling in relation to GDP, the combined surplus of the high-saving, oil-exporting countries has risen on the back of still high oil prices. In the absence of structural reform, combined with greater exchange rate flexibility and fiscal consolidation, a sustained rebalancing of global demand is unlikely to take place in the near term.
Restoring confidence is a key policy requirement
• Much of the current weakness is due to a generalised loss of confidence on the ability of policymakers to put in place appropriate responses. It is therefore imperative to act decisively to restore confidence and to implement appropriate policies to restore longer-term fiscal sustainability at a pace that depends on the state of the economy and to strengthen long-term growth.
• Resolution of the euro area sovereign debt turmoil involves a three-pronged strategy to break the link between sovereign debt and banking distress, to continue to ensure that the sovereign debt crisis does not spread to other larger European countries, and to secure appropriate short- and longer-term funding for banks. Resources to prevent contagion could come from increasing or leveraging existing EFSF funds and from a significant increase in sovereign bond purchases by the ECB and directly from national authorities.
• Monetary policy should remain accommodative. Interest rates should be kept on hold, and central banks should provide ample liquidity to calm tensions in financial markets. Policy responses should also involve contingent, including unconventional and yet untested, measures, if downside risks intensify and the near-term weakness turns out to be more pronounced than envisaged.
• Countries should put in place strong, credible medium-term frameworks for fiscal consolidation to restore confidence in the longer-term sustainability of the public finances and to build budgetary space to deal with short-term economic weakness. Given the downward risks to growth, it is important to anchor expectations about medium- and long-term fiscal probity so that a temporary easing of budget policy could be applied to buffer unexpected weakness if that were to occur. Equally important is to complement medium-term fiscal consolidation with pro-growth structural reform.
II. FINANCIAL MARKETS
The markets are at a dangerous intersection, waiting for Sunday’s meeting on the EU crisis. In an anticipation of a good outcome, the markets rallied in the past 2 weeks, but uncertainties remain. Many market participants expect something equivalent to:
1. A full EFSF ability of €440bn that can both buy sovereign bonds in the secondary market and invest directly into banks to recapitalise them.
2. A levered vehicle to take the total up to closer to €1tn, big enough to deal with more than Greece and substantial bank recapitalisation.
3. ECB action to keep a lid on sovereign yields.
4. The avoidance of a CDS event.
III. LATEST DEVELOPMENTS IN THE LABOUR MARKET AND SOME POLICY CHALLENGES
1. The labour market recovery appears to have stalled with the OECD unemployment rate still well above its pre-crisis level
• The OECD harmonised unemployment rate is estimated at 8.2% in August 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 44.3 million persons unemployed in the OECD area in August which, in turn, is 13.2 million more than the number of jobless persons immediately preceding the crisis.1
• 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 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 seven other countries.
• The highest unemployment rates in August were found in: Spain (21.2%), Greece (16.7%, June), Ireland (14.6%), the Slovak Republic (13.4%), Estonia (12.8%, second quarter), Portugal (12.3%) and Hungary (10.3%). The lowest rates were recorded in Korea (3.1%), Norway (3.2%, July), Switzerland (3.4%, second quarter), Austria (3.7%), Japan (4.3%), the Netherlands (4.4%) and Iceland (4.5%).
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 47.5 million persons, up 14.6 million persons since December 2007.
• The September unemployment rate in the United States was 9.1%. After declining steadily from 9.8 in November to 8.8% in March, job creation has slowed markedly in recent months allowing the unemployment rate to creep back up. 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.
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- skilled workers (3.0%), while employment has actually grown by 6.3% for high-skilled workers.
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
• 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 saw an increase from 29.2% to 57.6% and the share of long-term unemployed in Iceland soared from 2.9% in 2008 Q1 to 28.1% in 2011 Q1.
• 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. 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 2007 (see Figure 4). 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.
• 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 MEX AUS NZL DNK CZE ISR* DEU GBR SVN BEL CAN ISL ITA FIN SWE POL USA FRA HUN CHL 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.
The results for Japan excludes three prefectures (Iwate, Miyagi and Fukushima) struck by the Great East Japan Earthquake, where the survey operation is suspended since March 2011.
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 Q2.
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
-3.0
6.3
-14 -12 -10 -8 -6 -4 -2 0 2 4 6 8 10 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.
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
2007 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).
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 Aug 2011 %-point
change % change Dec 2007 Aug 2011 Absolute
change % change
OECD-34c 5.6 8.1 2.5 45.8 32 872 47 470 14 598 44.4
OECD (Official) 5.7 8.2 2.5 43.9 31 128 44 321 13 193 42.4
G7 5.5 7.7 2.2 40.0 20 118 27 905 7 787 38.7
European Union 7.0 9.5 2.5 35.7 16 531 22 785 6 254 37.8
Euro Area 7.4 10.0 2.6 35.1 11 611 15 739 4 128 35.6
OECD Europe 6.9 9.4 2.5 36.2 17 799 23 959 6 160 34.6
Australia 4.3 5.3 1.0 23.3 484 637 153 31.6
Austria 4.0 3.7 -0.3 -7.5 170 162 -8 -4.7
Belgium 7.2 6.8 -0.4 -5.6 342 336 -6 -1.8
Canada 6.0 7.3 1.3 21.7 1 081 1 368 287 26.6
Chile 7.2 7.4 0.2 2.8 564 567 3 0.5
Czech Republic 4.8 6.7 1.9 39.6 252 352 100 39.7
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 2 216 2 883 667 30.1
Germany 8.2 6.0 -2.2 -26.8 3 408 2 513 -895 -26.3
Greece 8.0 16.7 8.7 108.8 392 829 437 111.5
Hungary 8.0 10.3 2.3 28.8 337 439 102 30.3
Iceland 2.2 6.7 4.5 204.5 4 12 8 203.3
Ireland 4.9 14.6 9.7 198.0 109 307 198 181.7
Israeld 6.7 5.5 -1.2 -17.9 196 175 -21 -10.8
Italy 6.7 7.9 1.2 17.9 1 670 1 965 295 17.7
Japane 3.8 4.3 0.5 13.2 2 510 2 700 190 7.6
Korea 3.1 3.1 0.0 0.0 753 775 23 3.0
Luxembourg 4.2 4.9 0.7 16.7 9 12 3 33.3
Mexico 3.8 5.4 1.6 42.1 . . . . . . . .
Netherlands 3.3 4.4 1.1 33.3 283 382 99 35.0
New Zealand 3.4 6.5 3.1 91.2 78 154 76 97.4
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 1 667 258 18.3
Portugal 8.5 12.3 3.8 44.7 471 676 205 43.5
Slovak Republic 10.4 13.4 3.0 28.8 279 366 87 31.2
Slovenia 4.7 7.8 3.1 66.0 48 79 31 64.6
Spain 8.8 21.2 12.4 140.9 1 985 4 902 2 917 147.0
Sweden 6.0 7.4 1.4 23.3 290 371 81 27.9
Switzerland 3.2 3.4 0.2 6.3 151 167 16 10.5
Turkey 9.0 9.2 0.2 2.2 2 043 2 438 395 19.3
United Kingdom 5.1 8.0 2.9 56.9 1 569 2 509 940 59.9
United States 5.0 9.1 4.1 82.0 7 664 13 967 6 303 82.2
Harmonised unemployment rate Percentage of the labour force
Harmonised unemployment level In thousands
'. . : Not available.
a) Last month available: June 2011 for Greece, OECD-34, Turkey and the United Kingdom; July 2011 for Chile and Norway; 2011 Q2 for Estonia, Iceland, Israel, New Zealand and Switzerland (OECD harmonised unemployment rate data are not available on a monthly basis for the last five of these countries).
b) Harmonised unemployment data for 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.
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.
e) The results for Japan excludes three prefectures (Iwate, Miyagi and Fukushima) struck by the Great East Japan Earthquake, where the survey operation is suspended since March 2011.
Source: OECD Main Economic Indicators.
