OECD optimistic but sees eurozone lagging US

THE Organisation for Economic Cooperation and Development (OECD) has forecast that the recession-hit eurozone will fall further behind the US and Japan, but global economic growth will accelerate next year.

“The global economy is moving forward and it is doing so at multiple speeds,” OECD chief economist Pier Carlo Padoan said yesterday in the Paris-based organisation’s semiannual economic outlook.

Differing monetary and fiscal choices across the major developed economies were driving regional divergence, with “each path carrying its own mix of risks”, he said.

Global central banks are continuing to try to bolster their economies, with the Federal Reserve buying $85bn of debt a month and the Bank of Japan unveiling unprecedented stimulus last month. In the eurozone, where the European Central Bank cut its benchmark rate to a record low this month, the OECD said “more can be done through further nonconventional measures”.

The OECD sees US gross domestic product rising 1.9% this year and 2.8% next year, while Japan’s will increase 1.6% and 1.4%. The eurozone economy will shrink 0.6% this year before expanding 1.1% next year, according to the report.

In a separate release yesterday, German unemployment rose more than economists forecast this month as the eurozone debt crisis and a long winter took a toll on Europe’s largest economy. The number of people out of work climbed by 21,000 to 2.96million. Economists predicted an increase of 5,000, according to the median of 35 estimates.

The OECD, which advises its 34 member governments on economic policy, including SA, sounded a more optimistic note than in recent reports, praising the US for having “repaired” its financial system, welcoming Japan’s shift to a more stimulative monetary policy and noting that public debt levels in many eurozone countries will soon start to decline given the fiscal effort made over “several years”.

Combined growth across OECD countries will rise to 2.3% next year from 1.2% this year. China, which is not an OECD member, will expand 8.4% next year after growth of 7.8% this year, according to the report.

Still, Mr Padoan warned of risks related to the 17-nation currency zone, saying rising unemployment was the “most pressing challenge” and that countries in the region with trade surpluses such as Germany needed to allow wages to rise.

The eurozone jobless rate probably rose to 12.2% last month from 12.1% in March, economists said before a report on May 31.

The OECD forecast Spain’s unemployment would surge to 28% next year instead of peaking this year amid a weaker economic outlook than estimated last November.

It also cut its economic forecast for Italy for the second time this month as weak household demand extends the longest recession in more than two decades.

Italy’s gross domestic product will contract 1.8% this year before rising 0.4% next year.

“Protracted weakness could evolve into stagnation with negative implications for the global economy,” Mr Padoan said. “Reform fatigue is mounting as visible results in growth and jobs fail to materialise.”

For the US, the challenge will be how to unwind stimulus. Federal Reserve chairman Ben Bernanke disagrees about when to curtail bond buying, with him saying this month that a premature exit risks hampering growth. The OECD said an early withdrawal by the Fed “could jeopardise the recovery, but waiting too long could result in a disorderly exit from the programme”.

Speaking more broadly, Mr Padoan said yesterday protracted monetary easing “may lead to excessive risk taking, bubbles and resource misallocation”.

“Exit from unconventional monetary policy, when needed, may be difficult to manage and less smooth than desirable, possibly leading to sharp rises in bond yields and serious negative consequences for growth.”

The OECD further cut its growth outlook for most of central and eastern Europe and Russia yesterday but said a moderate turnaround in the economies was on the way.

Inflation in Russia has probably peaked and would return to the central bank’s target range.

The organisation called on Russia to set a longer-term inflation target to help anchor inflationary expectations and bring down long-term interest rates. Bloomberg