Ref. :  000021736
Date :  2005-11-25
Language :  English
Home Page / The whole website
fr / es / de / po / en

Less robust than meets the eye?

Author :  OCDE / OECD


World growth has been broadening over the past few months. Already strong in North America and most of Asia, economic momentum now looks well established in Japan, and continental Europe is progressively recovering from its latest bout of weakness. The fledgling European expansion has been facilitated by low long-term interest rates, euro depreciation and buoyant export markets, although final domestic demand is still growing below trend.

All in all, global growth has been exceptionally vigorous, fuelling large price increases in oil and commodities markets. These higher prices have acted as an impediment to recovery in those European economies which did not fully participate in the global expansion but as a moderating influence where aggregate demand was already buoyant. In a dynamic but turbulent environment, economic performance has been highly correlated with resilience. This connection was vividly illustrated in the United States,where the economy sailed through devastating hurricanes and disruptions in energy supplies. One important and reassuring feature of the present situation is that virtually all countries have maintained price stability in the face of the oil price shock, without compromising activity. Higher oil prices have not spilled over into higher wage demands and long-term inflation expectations seem well anchored. As a result, although headline inflation has surged, contagion to non-oil prices has remained minimal.

The absence of second-round effects is epitomised by the behaviour of core inflation – excluding food and energy. In the United States, despite the recent spike in gasoline prices, core inflation has remained stable at around 2%, in a context where there is little slack left in the economy. In contrast, in the euro area core inflation has been trending down over the past four years towards fairly low levels, against the backdrop of persistent slack. As a consequence, headline inflation has only moderately overshot the ECB’s long-term objective. In Japan, where the challenges are quite different, core inflation may reach into positive territory as the recovery broadens to household demand. Looking further ahead and assuming oil prices do not shoot up again, inflationary pressures should progressively recede. Indeed, core inflation is expected to drift only modestly upward in the United States, as activity expands beyond capacity, and to remain low in the euro area, where persistent economic slack would keep bearing down on prices.

With price stability being maintained, a powerful impetus arising from the Asian and US economies and the respending of oil exporters’ higher revenues, the case for a prolonged world expansion, finally extending to convalescent European economies, looks plausible. This is indeed the baseline presented in this Economic Outlook. But the risks surrounding such a forecast are substantial. They include a renewed surge in oil prices, ever-worsening current account imbalances and abrupt exchange rate realignments, as well as long-term interest rate back-ups and asset price reversals.

Because they involve financial variables and asset prices, which often behave erratically in the short run, the potential impact and timing of these risks is hard to pin down. As a result, they only feature in forecasting exercises in the form of risk assessments surrounding a central scenario. If they materialise, their consequences for growth and inflation may depend a lot on economies’ resilience.
It is worrying in this context that current account imbalances seem set to widen substantially over the next two years, with the US external deficit exceeding 7% of GDP in 2007 while China and Japan move into extremely large surpluses. These imbalances largely reflect inadequate macroeconomic policies, notably large fiscal deficits and tax incentives biased against savings in the United States and “mercantilist” exchange rate management geared towards market-share maximisation in several emerging Asian economies. As stressed in previous Economic Outlooks, such a policy configuration contributes to increasing the probability of a disorderly unwinding of current account imbalances, coupled with an evaporating appetite for dollar-denominated assets.

The economic consequences of such a shift in market preferences seem clear: long-term interest rate back-up and falling asset prices, including house prices, in the United States; steep currency appreciation and strong deflationary risks in those areas outside the United States (Japan, euro area) where core inflation is already low and sometimes falling; and, finally, weakening world growth. Given the relentless drift in imbalances, adjusting policies becomes increasingly pressing. It would help ensure world growth is sustainable and does not overly rely on borrowed momentum.

The risks surrounding energy prices are less easy to gauge. On the one hand, oil prices could still be on an upward mid-term path, but on the other hand they may well have overshot in the short-run. On a less speculative note, it seems likely that the full impact of higher oil prices on activity and inflation may take time to materialise. It cannot be excluded for instance that following an extended period of real income losses, wages finally accelerate. As well, the negative consequences for investment of higher and more volatile oil prices may set in only gradually.

Worsening fiscal and current account imbalances present policymakers with clear challenges.Addressing them successfully will require substantial policy adjustments. In the United States, where aggregate demand is buoyant, there is a clear need for early fiscal retrenchment and tax reform to redress the saving/investment balance in conjunction with the current tightening of monetary policy. In Japan, mounting public spending pressures associated with ageing call for faster fiscal tightening, while monetary policy should keep a very easy stance until the output gap moves squarely into positive territory and deflation is definitively uprooted.

In the euro area, where underlying inflation has been steadily declining and economic slack remains entrenched, monetary tightening should wait until the recovery gathers enough momentum and becomes more resilient, which may take a few more quarters. At the same time, euro area governments should take advantage of buoyant foreign demand and accommodative monetary conditions to push ahead with economic reforms and start restructuring public finances in earnest, at a pace commensurate with the returning momentum of the recovery. Achieving fiscal consolidation, while preserving the recovery, means in particular giving priority to spending cuts over tax increases so that deficit reduction is both growthfriendly and long-lasting.

25 November 2005
Jean-Philippe Cotis
Chief Economist





Rate this content
 
 
 
Average of 44 ratings 
Rating 2.16 / 4 MoyenMoyenMoyenMoyen
Same author:
 flecheObesity Update 2017
 flecheHow’s life?
 flecheBetter international co-ordination could lead to more worldwide benefits from migration
 flecheSingapore tops latest OECD PISA global education survey
 flecheCities will become inequality traps without better housing, transport policies
 flecheGrowing risk of social exclusion among early school leavers
 flecheThe Economic Consequences of Outdoor Air Pollution
 flecheCompare your country: International Migration
 flecheOECD International Migration Outlook 2016
 flecheGovernments must address anti-immigration backlash
 flecheAfrican Economic Outlook 2016
 flecheEnvironmental performance review of France 2016: France will need further effort to meet environmental goals
 flecheOECD Economic outlook
 flecheGlobal economy stuck in low-growth trap: Policymakers need to act to keep promises, OECD says in latest Economic Outlook
 flecheLending to SMEs and entrepreneurs is improving, but more diverse forms of financing are needed
 flecheWorld imports of fake goods worth nearly half a trillion USD a year
 flecheOECD study finds Britons will be paying a heavy “Brexit tax” for many years if UK leaves EU
 flecheDevelopment aid rises again in 2015, spending on refugees doubles
 flecheOECD countries confirm their drive to improve gender equality in public leadership
 flecheFlux de cocaïne
 flecheNew data show importance of quality as well as quantity of jobs and how both evolved during crisis
 flechePolitical finance needs tighter regulation and enforcement
 flecheA boost to transparency in international tax matters: 31 countries sign tax co-operation agreement to enable automatic sharing of country by country information
 flecheFurther reforms needed to tackle growing risk of pensioner poverty
 flecheSpain’s future prosperity depends on raising skill levels and removing barriers to employment
 flecheCountries should address disruptive effects of the digital economy
 flecheDiscrimination and poor job prospects hit children of immigrants
 flecheMore than 3 million German emigrants in OECD countries
 flecheAction is needed to secure future livelihoods in developed and emerging economies, says the OECD Development Centre
 flecheLow oil prices and monetary easing triggering modest acceleration of global recovery
 flecheEarly gender gaps drive career choices and employment opportunities
 flecheShifts in migration underline need for policy reform, says OECD
 flecheAsia/Pacific countries need to improve affordable access to healthcare, says OECD
 flecheComprehensive action needed to shift the global economy into higher gear, says OECD in latest Economic Outlook
 flechePoorer regions struggling to catch up in advanced economies, says OECD
 flecheEmployment
 flecheOECD releases first BEPS recommendations to G20 for international approach to combat tax avoidance by multinationals
 flecheProgress made but Chile should better detect and thoroughly investigate foreign bribery, says OECD
 flecheAmbitious structural reforms can pave the return to strong and sustainable growth, OECD says
 flecheEmployment situation, third quarter 2013, OECD
 flecheLatin America: Tax revenues continue to rise, but are low and varied among countries, according to new OECD-ECLAC-CIAT report
 flecheAsian countries top OECD’s latest PISA survey on state of global education
 flecheOECD Employment Outlook
 flecheGlobal economy advancing but pace of recovery varies, says OECD Economic Outlook
 flecheGlobal economy is improving but Europe lags behind, says OECD
 flecheGlobal portal on product recalls
 flecheInternet firms driving information technology industry growth, says OECD
 flecheInternational Economic Forum on Africa (4 October 2012, Paris - France)
 flecheAgriculture: Increased productivity and a more sustainable food system will improve global food security OECD and FAO publish new Agricultural Outlook
 flecheEconomy: migration starting to rebound, says OECD
 flecheCreate Your Better Life Index
 flecheGrowth in health spending grinds to a halt
 flecheTowards Green Growth: Monitoring Progress - OECD Indicators
 flecheWater: Balancing demand
 flecheReducing inequality while boosting economic growth is possible, says OECD
 flecheEconomy: Global shocks to become more frequent, says OECD
 flecheEnvironment: Green and growth go together
 flecheKorea and Finland top OECD’s latest PISA survey of education performance
 flecheEnvironmental taxation can spur innovation, says OECD
 flecheHealth: OECD says governments must fight fat
 flecheOECD iLibrary: New platform delivers integrated access to OECD’s knowledge base
 flecheEconomy: Recovery slowing amid increased uncertainty, says interim economic assessment
 flecheDeveloping countries set to account for nearly 60% of world GDP by 2030, according to new estimates
 flecheEconomy : G20 keeps investment flows open, but continued vigilance needed, say OECD, UNCTAD
 flecheDevelopment aid rose in 2009 and most donors will meet 2010 aid targets
 flecheWater: The right price can encourage efficiency and investment
 flecheDonors’ mixed aid performance for 2010 sparks concern
 flecheSqueeze on public budgets boosting e-government, says OECD
 flecheGurría calls for ‘new generation’ of statistics to reinforce public confidence in government
 flecheOECD welcomes experts’ call on need for new measures of social progress
 flecheOECD Global Forum consolidates tax evasion revolution in advance of Pittsburgh
 flecheKeep doors open to migrant workers to meet long-term labour needs, says OECD
 flecheOECD Teaching and Learning International Survey (TALIS)
 flecheDevelopment Aid at its highest level ever in 2008
 fleche10th OECD forum (23-24 june 2009, Paris)
 flecheCrisis is an opportunity to revive trade reforms, says OECD report
 flecheRebalancing the world Economy: OECD development co-operation report 2009
 flecheOECD composite leading indicators fall to lowest levels since 1970s
 flecheIncome inequality and poverty rising in most OECD countries
 flecheFinancial centres become more transparent, but information exchange remains a problem for some
 flecheTailor immigration policies to future needs, says OECD
 flecheBiofuel policies in OECD countries costly and ineffective, says report
 flecheLabour market discrimination still a big problem in OECD countries
 flecheFarm policy reform urgent amid rising world food prices
 flecheOECD-FAO Agricultural Outlook 2008-2017 - Highlights
 flecheOECD countries stay open to commercial investments by sovereign wealth funds
 flecheDebt Relief is down: other ODA rises slightly
 flecheOECD Environmental Outlook to 2030 - Summary
 fleche2008 OECD Environmental Outlook - How much will it cost to address today's key environmental problems?
 flecheHelping immigrants integrate better into society must become a priority, says OECD Secretary-General
 flecheGovernments must do more to help workers adapt to new global economy, says OECD
 flecheOECD Employment Outlook - 2007 Edition - Summary
 flecheOECD Employment Outlook 2007 - Statistical Annex
 flecheIntergenerational Transmission of Disadvantage: Mobility or Immobility across Generations? A Review of the Evidence for OECD Countries
 flecheInternational migration to OECD countries continues to grow in response to labour needs
 flecheReport "Giving Knowledge for Free: The Emergence of Open Educational Resources"
 flecheOpen Educational Resources bring new opportunities, challenges
 flecheOECD annual ministerial meeting to discuss globalisation, innovation and trade (Paris on 15-16 May 2007)
 flecheOECD warns against reform complacency as new report highlights priorities for action
 flecheThe Euro area - will the recovery last?
 flecheOECD Global Forum on International Investment “Enhancing the investment climate: the case of infrastructure”
 flecheMore OECD countries focusing on early childhood as key to education success
 flecheThe Gender, Institutions and Development Data Base
 flecheOECD-FAO Agricultural Outlook - 2006-2015
 flecheAfrican Economic Outlook 2005/2006: Economic prospects improve in much of Africa, though transportation remains a problem
 flecheOECD Forum 2006 : "Balacing Globalisation" (Paris, 22-23 May 2006)
 flecheL’OCDE incite les pouvoirs publics et l’industrie à intensifier la lutte contre le spam
 flecheMinisters look to integrate environment protection with development aid 3 - 5 April at OECD headquarters
 flecheLes élèves qui maîtrisent l’informatique obtiennent de meilleurs scores à l'école
 flecheOECD Handbook on Economic Globalisation Indicators
 flecheConference on the future digital economy: digital content creation, distribution and access (30-31 January 2006, Rome - Italy)
 flecheOECD and the WTO Hong Kong Ministerial Conference
 flecheOECD urges freer trade combined with structural adjustment to reap benefits from globalisation
 flecheGlobal scientific research project launched to improve understanding of the human brain
 flecheEconomic Survey of the Euro Area 2005
 flecheOECD countries warn of continuing shortfalls in insurance coverage against terrorism
 flecheOECD urges governments to work with social partners on teacher policy
 flecheOECD urges more dynamic employment policies as response to globalisation
 flecheAgriculture export competition will intensify, with rising share of trade by developing countries
 flecheHigh-Level Meeting of the OECD Committee for Agriculture, 14-15 June 2005 - Chair Franz Fischler's Summary
 flecheBrazil, China, India and South Africa to tackle food and agriculture challenges with OECD
 flecheOECD Ministerial Council Meeting, 3-4 May 2005, Chair’s Summary
 flecheOECD environmental performance review of France - A positive but demanding assessment
 flecheCentral Asia since 1991 - The Experience of the New Independent States
 flecheLand, Violent Conflict and Development
 flecheThe Impact of Social Institutions on the Economic Role of Women in Developing Countries
 flecheLa condition des femmes en Inde, Kenya, Soudan et Tunisie
 flecheDecentralisation and Poverty in Developing Countries: Exploring the Impact
 flecheData base on immigrants and expatriates
 flecheDonnées environnementales
 flecheStructure and Trends in International Trade in Services
 flecheWorld trade / 2002- 2004
 flecheOECD Releases New GDP Comparisons Based on 2002 Purchasing Power Parities
 flecheJohnston, Donald J.
 flecheOECD Governments, Insurers Clarify the Definition of Terrorism for Insurance Purposes
 flecheCT Access now Widespread but Laggard Users Risk New Digital Divide, Warns OECD
 flechePISA 2003
 flecheTop-performer Finland improves further in PISA survey as gap between countries widens
 flecheBhagwati, Jagdish
 flecheTruly global
 flecheOECD's Environmental Performance Review of Sweden
 flecheOECD International Trade Statistics - Trends in Second Quarter 2004
 flecheEducation Levels Rising in OECD Countries but Low Attainment Still Hampers Some
 flecheOECD Economic Outlook - may 2004
 flecheAnalyse des politiques d'éducation
 flecheOECD Task Force to Coordinate Fight against Spam
 flecheFrance Needs More Regulatory Reform to Strengthen its Economy, Says OECD
 flecheOECD Countries are not on Track to Meet their Environmental Commitments
 flecheEnvironment Ministers to Meet at OECD 19-21 April 2004
 flecheOECD Backs Broadband for Economic and Social Development
 flecheActivites de lutte contre la corruption en Europe de l'Est et central
 flecheScience, Technology and Innovation for the 21st Century. Meeting of the OECD Committee for Scientific and Technological Policy at Ministerial Level, 29-30 January 2004
 flecheDeclaration by the Heads of the IMF, OECD and World Bank
 flecheOECD Report Warns of Growing Risk of Teacher Shortages in OECD Countries
 flecheCompetition in the spotlight
 flecheL'OCDE incite les gouvernements à rendre leurs systèmes fiscaux plus efficaces
13
SEARCH
Keywords   go
in 
Translate this page Traduire par Google Translate
Share

Share on Facebook
FACEBOOK
Partager sur Twitter
TWITTER
Share on Google+Google + Share on LinkedInLinkedIn
Partager sur MessengerMessenger Partager sur BloggerBlogger