Recent Economic Developments

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Recent Economic Developments

Paris, 29 March 2011

Pier Carlo Padoan

OECD Chief Economist and Deputy Secretary-General

Meeting of the Members of the Council 29 March 2011

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• Commodity price developments

• Inflation

• Monetary policy

• Capital flows

• Euro-area developments

Outline

O ut lin e

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Energy and food prices are surging

Co m m od ity Pr ic es

Source: Datastream; OECD, Main Economic Indicators database.

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Concerns about supply disruption has recently driven oil prices upward

Co m m od ity Pr ic es

Note: The vertical bars identify the cut-off date for information used in the EO88 projections (12 November 2010), when the oil price assumption was set at $80 per barrel, and the beginning of demonstrations in Tunisia (17 December 2010), Egypt (25 January 2011) and Libya (18 February 2011).

Source: Datastream. ⁵

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Drivers of oil price increases

Co m m od ity Pr ic es

Oil prices have increased by around 40% since December Main drivers of oil price hike

• Demand may have been stronger than anticipated in EO

• Unrest in the Middle East and North Africa prompted concern about supply security

• The impact of the Japanese disaster on world energy markets is unlikely to be large; long-run increase in

demand to the extent that there is a global drift away from nuclear

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Impact on activity and inflation and other commodity prices

Co m m od ity Pr ic es

Impact of higher oil prices on activity and inflation

• OECD estimates suggest that $10 increase:

• Activity could fall by 0.2 ppt in 2^nd year

• Inflation could rise by 0.3 ppt over 2 years

Metal prices reflect strong demand and slowly responding supply

Food prices reflect high demand and supply disruptions and distortions

• Energy accounts for over one-third of the costs of grain production

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Headline inflation and expectations

In fa ltio n

1. Consumer price index, 12-month percentage change, three-month moving average.

2. Expected inflation implied by the yield differential between 10-year government benchmark bonds and inflation-indexed bonds (Merrill Lynch).

Source: OECD, Main Economic Indicators database; Datastream. 8

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Headline inflation has trended up in emerging-market economies

Consumer price index, 12-month percentage change¹

In fa ltio n

1. Three-month moving average.

Source: OECD, Main Economic Indicators database.

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Monetary policy is responding in EMEs

Policy interest rates, percentage points

M on et ar y P olic y

Source: Federal Reserve, Bank of Japan, European Central Bank, Central Bank of Brazil, Reserve Bank of India, and People's Bank of China.

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Short-term financial conditions are tightening

Short-term interest rates, percentage points

M on et ar y P olic y

Source: OECD, Main Economic Indicators database.

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Central bank balance sheets continue to play an important role

Central bank liabilities, local currencies

M on et ar y P olic y

Source: Federal Reserve; Bank of Japan; European Central Bank; and Bank of England.

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Impacts of capital flows

Ca pit al F lo w s

Capital flows are likely to support long-term growth but may pose risks in the near term; structural policy settings matter:

• Excessive capital inflows may challenge the absorptive capacity of the recipient economy

• Improved structural policies could help to modify the composition of capital flows towards more stable and productive sources of balance-of-payments financing

• Structural policies can reduce potential risks associated with capital flow reversals

A cooperative effort is needed to identify a common

framework for capital account-related policies that would provide a level playing field for countries while preserving their ability to deal with short-term volatility.

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Bond yields continue to climb in some euro-area countries

10-year government bond yields, percentage points

Eu ro a re a

Note: Last observation is 21 March 2011.

Source: Datastream; and OECD calculations.

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Euro-area policy accouncements

Eu ro a re a

European Council decisions

• The increase in the size of the eurozone's financial bailout

mechanism, the European Financial Stability Facility (EFSF), to

€440bn will take place only in June.

• The European Stability Mechanism (ESM) is set to be launched in 2013 to replace the EFSF after making changes to the structure of the capital payments. Under the new schedule, the ESM will start with less paid-in capital (full paid-in capital will be achieved two years later).

• Euro-Plus-Pact ("competitiveness pact”) providing for closer economic coordination between Euro-area states and non-

Euro countries. Six non-euro area countries (Denmark, Poland, Latvia, Lithuania, Bulgaria and Romania) plan to join.

• Fiscal surveillance in Stability and Growth Pact will be

strengthened. The Council has decided that in case of breaking the SGP rules, a majority against automatic sanctions is now required. ¹⁵

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Private saving criterion

Gross private savings in 2009, in per cent of GDP

Eu ro a re a

1. Refers to 2008.

Source: OECD, System of National Accounts database; and OECD calculations.

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