What is the economic outlook for OECD countries?

Paris, 28 November 2011 11h Paris time

Pier Carlo Padoan

Deputy Secretary-General and Chief Economist

The outlook
Real GDP growth, in per cent 2010 United States Euro area Japan 3.0 1.8 4.1 3.1 7.5 10.4 9.9 6.1 4.0 2.8 2011 1.7 1.6 -0.3 1.9 3.4 9.3 7.7 6.3 4.0 3.2 2012 2.0 0.2 2.0 1.6 3.2 8.5 7.2 6.1 4.1 3.6 2013 2.5 1.4 1.6 2.3 3.9 9.5 8.2 6.5 4.1 4.7

The outlook

Total OECD Brazil China India Indonesia Russian Federation South Africa

Source: OECD Economic Outlook 90 database.

2

Confidence is weakening
Business confidence
65 60 65 60 1

Consumer confidence
1

0.5

0.5

55 50

55 50 45

-0.5

-0.5

Confidence

45

-1

-1

40 35 United States 30 25 2008 2009 2010 2011 Japan Euro area

40 35 30 25

-1.5

-1.5

-2 United States -2.5 Japan Euro area -3 2008 2009 2010 2011

-2

-2.5

-3

Note: Manufacturing sector. Values greater than 50 signify an improvement in economic activity. Source: Markit Economics Limited.

Note: Values below zero signify levels of consumer confidence below the period average. Source: OECD Main Economic Indicators.
3

Equity markets extremely volatile

Share price indices, January 2010 = 100
130 United States United Kingdom 120 China Euro area Japan 120 130

110

110

Equity prices

100

100

90

90

80

80

70 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11

70

Note: Wilshire 5000, FTSE Eurotop 100, FTSE 100, Nikkei 225, Shanghai Composite. Last observation: 23-11-2011. Source: Datastream
4

Financial conditions tightening

OECD Financial Conditions Index
6 United States 4 Japan Euro area 4 6

Financial conditions

-2

-2

-4

-4

-6 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Note: A unit increase (decline) in the index implies an easing (tightening) in financial conditions sufficient to produce an average increase (reduction) in the level of GDP of to 1% after four to six quarters. Source: Datastream; OECD Economic Outlook 90 database; and OECD calculations.

-6

Euro-area sovereign spreads widening

10-year government bond yield spreads versus German bunds, percentage points
35 Italy 30 Greece Ireland 30 6 35 7 France Austria Belgium 25 5 Netherlands 5 6 7

Sovereign spreads

25

Portugal Spain

20

20

15

15

10

10

0 NovJan-10 MarJan-11 MarJul-10 Jul-11 NovSepSepMay May

0 Jul-10 May-10 May-11 Jan-10 Nov-10 Jan-11 Jul-11 Mar-10 Mar-11 Nov-11 Sep-10 Sep-11

Note: Last observation: 24-11-2011. Source: Datastream.

6

Divergent euro area labour costs

Unit labour costs, 2000 = 1
1.6 Germany 1.5 France Ireland Portugal 1.4 Spain Greece 1.3 Italy 1.3 1.4 1.5 1.6

Euro area rebalancing

1.2

1.2

1.1

1.1

0.9 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: OECD Economic Outlook 90 Database.

0.9

World trade has stagnated

CPB world trade index
170 160 150 140 170 160 150 140 130 120 110 100 90 80 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

World trade

130 120 110 100 90 80

Note: Index 2000 = 100. Source: CPB.

8

The recovery will resume slowly

Annualised quarterly real GDP growth, in percent
12 8 4 0 -4 -8 United States -12 -16 -20 Q1 2008 Q1 2009 Q1 2010 Q1 2011 Q1 2012 Q1 2013 Euro area Japan

GDP growth

Source: OECD Economic Outlook 90 database.

9

Growth to be sustained by non-OECD

Contribution to annualised quarterly world real GDP growth, percentage points
8 6 4 2 0 -2 OECD -4 Non-OECD -6 -8 2007 2008 2009 2010 2011 2012 2013

World growth

Note: Calculated using moving nominal GDP weights, based on national GDP at purchasing power parities. Source: OECD Economic Outlook 90 database.
10

Unemployment will remain high

Unemployment rates, percentage of labour force
12 United States 10 Euro area Japan 8 8 10 12

Unemployment

0 2006 2007 2008 2009 2010 2011 2012 2013

Source: OECD Economic Outlook 90 database.

11

Policy rates becoming accommodative

Policy interest rates, in percent
16 United States 14 12 Japan China Euro area Brazil India 14 12 10 8 6 4 2 0 Jan-08 Jan-09 Jan-10 Nov-08 Nov-09 Nov-10 Jan-11 Mar-08 Mar-09 Mar-10 Mar-11 May-08 May-09 May-10 May-11 Nov-11 Sep-08 Sep-09 Sep-10 Sep-11 Jul-08 Jul-09 Jul-10 Jul-11 16

Monetary policy

10 8 6 4 2 0

Source: Datastream; Central Bank of Brazil; Reserve Bank of India; and CEIC.
12

Fiscal consolidation is ongoing

Change in underlying primary balance 2011 to 2013, percent of GDP
6 Spending side Revenue side 4 4 6

Fiscal policy

-1 PRT GRC ITA HUN IRL POL ESP FRA GBR BEL USA NLD AUT DEU EST DNK JPN CHE

-1

Note: Percentage of potential GDP. Total consolidation is the projected difference in the underlying primary balance; revenue side is the projected increase in the underlying receipts excluding interest earned on financial assets; and spending side is the projected decline in the underlying primary spending excluding interest payments on debt. Source: OECD Economic Outlook 90 database; and OECD calculations.
13

The downside scenario

Intensification of euro-area crisis and excessive US fiscal consolidation
10 8 6 4 2 0 -2 -4 2012 2013 2012 2013 2012 Japan 2013 2012 China 2013 Baseline Downside scenario 10 8 6 4 2 0 -2 -4

Downside scenario

United States

Euro area

Source: OECD calculations.

14

The upside scenario

Euro-area debt crisis successfully defused
12 Baseline 10 Upside scenario 8 8 10 12

Upside scenario

0 2012 2013 2012 2013 2012 Japan 2013 2012 China 2013

United States

Euro area

Source: OECD calculations.

15

Prerequisites for achieving the upside

The euro area: Stop contagion The 26 October package: Stabilisation by ensuring an adequately resourced European Financial Stability Fund (EFSF).

Upside prerequisites

Voluntary Greek sovereign debt haircut. Shoring up the banking sector through recapitalisation. Be ready to provide liquidity to the banking sector if needed. Overhaul of euro-area governance, combined with substantive structural reforms. These measures need to be followed up at the next ECOFIN Council on 9 December. The United States: Efforts need to be redoubled to reach an agreement on a credible fiscal programme.
16

The OECD Strategic Response

Identifies country-specific policy measures that could be implemented in the event of a relapse: Fiscal support backed by improved fiscal frameworks where public finances and confidence allows.

Strategic response

Monetary policy easing where possible. Structural reforms to strengthen growth, lower unemployment and bolster confidence.

17

What is the economic outlook for OECD countries?

Paris, 28 November 2011 11h Paris time

Pier Carlo Padoan

Deputy Secretary-General and Chief Economist

18