Download What is the economic outlook for OECD countries

What is the economic outlook
for OECD countries?
An interim assessment
Paris, 7th April 2010
11h Paris time
Pier Carlo Padoan
OECD Chief Economist
1
Recent high-frequency indicators point to a continued recovery of the world economy, albeit at
variable speeds across countries and regions.
1.

Financial conditions have improved on the back of narrowing money market spreads, and
buoyant corporate bond and equity markets, notwithstanding the gyrations associated with the
Dubai and Greek sovereign bond duress. Lending conditions have eased considerably. Despite
their improved capital positions, banks nevertheless remain vulnerable to credit losses and
exposed to interest-rate risk. Financial markets have been resilient in emerging markets, whose
sovereign bond spreads have continued to narrow.

OECD countries have benefited through trade linkages from strong activity growth in major
emerging-market economies, including China, India and Brazil.

Following a sharp narrowing during the recession, global imbalances have widened somewhat as
activity has picked up. Large external imbalances remain within the euro area.

Economic activity gathered steam in most of the major OECD economies in the last quarter of
2009, with the notable exception of the euro area. Private consumption has strengthened in the
United States and external demand remains robust in Japan. House prices have turned around in
many countries. Business confidence has continued to improve, especially in the nonmanufacturing sectors.

Labour market indicators have stabilised. Following a sharp increase during the recession, the
unemployment rate has probably peaked in the United States. By contrast, the increase in
unemployment has been milder in the euro area.
2.
Taking the most recent dataflow into account, the OECD short-term forecasting models suggest that
growth is likely to slow down in the first half of 2010 (see table opposite). GDP is expected to
continue to expand at a faster clip in the United States than in Japan and the largest euro-area
countries. The unusually severe winter weather and the timing of the Lunar New Year in Asia
complicate the assessment of high-frequency indicators in the current juncture. Nevertheless, a
number of factors are expected to bear down on activity in the very near term. Support from the
inventory cycle is set to begin to fade and some fiscal stimulus measures are expected to come to an
end. Private demand is poised to continue to suffer from sluggish credit growth and weak labour
markets.
3.
As regards inflation, headline measures have now moderated, as the upward pressures associated
with rising commodity prices have ebbed in recent months. Considerable economic slack continues
to put a damper on core inflation. Near-term expectations, despite a recent rise, remain relatively
close to inflation objectives in Japan and the euro area. Signals about future inflation are mixed in
the United States and the United Kingdom. Rapid increases in food prices have been pushing up
inflation in China and India.
4.
Despite some encouraging signs on activity, the fragility of the recovery, a frail labour market and
possible headwinds coming from financial markets underscore the need for caution in the removal
of policy support. Central banks have already begun to rein in the exceptional liquidity stimulus
injected during the recession. Further action in this area will need to be guided by financial
conditions. The normalisation of policy interest rates should be carried out at a pace that will be
contingent on the strength of the recovery in individual countries and the outlook for inflation
beyond the near-term projection horizon. As for fiscal policy, the sharp increase in government
indebtedness in the OECD area during the downturn calls for ambitious, clearly communicated
medium-term consolidation programmes in many countries. Consolidation should start in 2011, or
earlier where needed, and progress gradually so as not to undermine the incipient recovery.
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Underpinnings and status of the interim forecast
Since March 2003, the OECD has presented a brief overview of the near-term prospects in the major
OECD economies between each issue of the Economic Outlook. This interim assessment should not be
seen as a full update of the biannual Economic Outlook projections, since it rests on a more limited
information set, has a shorter horizon and covers a much smaller number of economic variables and
countries. However, it helps evaluate the extent to which the latest Economic Outlook projections are
still on track for the larger economies.
In this context, the main tool is a suite of indicator-based models that serve to forecast real GDP for
each of the G7 economies.* These models cover the two quarters following the last one for which
official data have been published. They use a small, country-specific selection of monthly indicators,
hard (e.g. industrial production, retail sales) and/or soft (e.g. business confidence). These models have
been shown to outperform a range of other models relying solely on published quarterly data, as
regards both forecast-error size and directional accuracy. The weight of the different models varies
across countries and over time, according to observed forecasting performance. The models used for
the US and the UK economies have been modified to better capture the influence of developments in
the housing sector, with the inclusion of various forward-looking housing indicators.
_______________
* See Pain, N. and F. Sédillot, “Indicator models of real GDP growth in the major OECD economies”,
OECD Economic Studies, No. 40, 2005 and Mourougane, A., “Forecasting monthly GDP for Canada”,
OECD Economics Department Working Paper, No. 515, 2006.
3
GDP growth in the G7 economies
In per cent
Annualised quarter-on-quarter growth
1
09Q1
09Q2
09Q3
09Q4
10Q1
10Q2
United States
Japan
Euro 32
Germany
France
Italy
-6.4
-13.6
-10.1
-13.4
-5.3
-10.4
-0.7
6.1
0.7
1.8
1.4
-1.9
2.2
-0.5
2.0
2.9
0.7
2.1
5.6
3.8
0.4
0.0
2.4
-1.3
2.4 (+/-1.6)
1.1 (+/-2.5)
0.9 (+/-1.4)
-0.4 (+/-1.8)
2.3 (+/-0.9)
1.2 (+/-1.4)
2.3 (+/-1.4)
2.3 (+/-2.7)
1.9 (+/-1.5)
2.8 (+/-1.8)
1.7 (+/-1.1)
0.5 (+/-1.6)
UK
Canada
-10.0
-7.0
-2.7
-3.5
-1.1
0.9
1.8
5.0
2.0 (+/-1.1)
6.2 (+/-1.0)
3.1 (+/-1.2)
4.5 (+/-2.0)
G7
-8.8
0.4
1.4
3.7
1.9 (+/-1.5)
2.3 (+/-1.7)
1. Based on GDP releases and high-frequency indicators published by 2 April 2010. Seasonally and in some cases
also working-day adjusted. The error ranges (in parentheses) associated with the point estimates reflect the
differences between model-based projections and outcomes during 2003-07 using the latest available vintage of GDP
and indicator data.
2. The average of the three largest countries in the euro area (Germany, France and Italy).
4
Money market spreads have stabilised recently
Percentage points
Note: Spread between three-month EURIBOR and EONIA three-month swap index for the euro area; spread between three-month
LIBOR and three-month overnight index swap for the United States and Japan.
Source: Datastream; and Bloomberg.
5
Corporate bond yields have receded
In per cent
Source: Datastream; Merrill Lynch; IBOXX.
6
Share prices are still rebounding
Source: Datastream.
7
Financial conditions have improved markedly
Note: A unit decline in the index implies a tightening in financial conditions sufficient to produce an average reduction in the level of
GDP by 1/2 to 1% after four to six quarters. See details in Guichard et al. (2009).
Source: Datastream; and OECD calculations.
8
Emerging market bond spreads are narrowing
Note: All series are JPM EMBI Global Diversified stripped spreads.
Source: JP Morgan.
9
Industrial production is bouncing back strongly
Year-on-year percentage changes
Note: Data for China are OECD estimates. Seasonally adjusted series for Brazil and China.
Source: Datastream.
10
Global trade has recovered in earnest
1.
Balance of respondents reporting an increase and a decrease in export orders.
Source: OECD, Main Economic Indicator database; and OECD calculations.
11
Is a new pattern of global imbalances emerging?
Current account balance, in per cent of GDP
Source: OECD, Quarterly National Accounts database; and OECD, Main Economic Indicators database.
12
Large external imbalances remain in the euro area
Current account balance, in per cent of GDP
Source: OECD, Quarterly National Account database; and OECD, Main Economic Indicators database.
13
House prices are turning around
Proportion of countries with rising real house prices, in per cent
Note: Based on quarter-on-quarter changes. House prices are deflated by the private consumption deflator. Includes 19 OECD
countries.
Source: Various national sources.
14
Business confidence has rebounded
1.
Purchasing Managers' Index: summary composite index based on seasonally adjusted diffusion indices for five of the
manufacturing survey indicators.
Source: Markit Economics Limited; and OECD, Quarterly National Accounts database.
15
Short-term outlook for the G7 economies has improved
Developments in the OECD Indicator Model for Q1 2010 GDP forecasts, GDP growth in per cent
1.
Average of the three largest countries in the euro area (Germany, France and Italy).
Source: Datastream; Markit Economics Limited; and OECD calculations.
16
Unemployment rates are peaking in some countries
In per cent of the labour force
Source: OECD, Main Economic Indicators database; and OECD Economic Outlook 86 database.
17
Underlying inflation is coming down
Year-on-year change in per cent
Note: PCE deflator refers to the deflator of personal consumption expenditures, HICP to the harmonised index of consumer prices
and CPI to the consumer price index.
Source: OECD, Main Economic Indicators database; and Eurostat.
18
Inflation expectations are trending upwards in some countries
Based on bond yield differentials (Merrill Lynch), in per cent
Note: Expected inflation implied by the yield differential between the ten-year government benchmark and inflation-indexed bonds.
Source: Datastream.
19
Commodity prices have recovered
Source: OECD, Main Economic Indicators database.
20
Policy interest rates remain low in the major economies
In per cent
Source: Federal Reserve; Bank of Japan; and European Central Bank.
21
Public finances have weakened significantly
General government balance, in per cent of GDP
Note: Government balance for 2009 is an estimate for some countries. Countries are ranked according to the government balance in
2009.
1.
Mainland Norway only.
Source: OECD, System of National Accounts database; and OECD Economic Outlook 86 database.
22
Long-term interest rates tend to rise with government indebtedness
Spread between long- and short-term interest rates
Note: Bars represent averages across all OECD countries for which data are available over the period 1994 to 2008. Short-term
interest rates are typically rates on 3-month Treasury bills and long-term interest rates are those on 10-year government bonds.
Source: OECD, System of National Accounts database; and OECD, Main Economic Indicators database.
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