Making the most of the recovery

Click to enlarge.

After a drawn-out period of fits and starts, a palpable recovery has finally taken hold across the OECD. Yet, the persistence of very large current account imbalances at this early stage of the recovery may complicate the encouraging outlook.

The strong momentum already achieved in Asia, North America and the UK provides ample evidence of the renewed strength of the world economy. Despite lingering domestic weaknesses, continental Europe is also on its way to join the recovery.

This turn for the better stems from a variety of factors. Since the spring, the geopolitical environment has steadied, allowing oil prices to stabilise and confidence to strengthen. In the United States, this revival of “animal spirits” has taken place in a context where the underlying stimulus provided by monetary and fiscal policies was still very powerful and where past excesses in business investment had been largely worked off. As expected in the previous OECD Economic Outlook, the US economy has recovered strongly, with investment starting to take over the baton from consumption. More fundamentally, the US economy will greatly benefit from strong productivity gains and high potential growth over the next few years.

The American upswing has coincided with a marked and better-than-expected improvement in Japan, driven in large part by better investment prospects in the manufacturing sector and fast-growing markets in neighbouring Asian economies.

Looking further ahead, the most likely scenario for the next two years is one of sustained growth in the United States and progressive recovery in Europe and Japan, in a context of low inflationary pressures and with a gradual reduction in unemployment. This central scenario would be underpinned by a prolonged period of monetary ease and moderate long-term interest rates.

While encouraging, this scenario is not devoid of vulnerabilities. In Europe, balance sheet problems are still prevalent in the business sector and will continue to inhibit investment. In a variety of countries – including the United States, the United Kingdom and Australia – households remain highly indebted and may suffer large wealth losses, especially in the housing sector, should interest rates increase abruptly. Such a back-up in interest rates cannot be ruled out in a context where all large OECD countries are now suffering from historically wide public deficits which will not disappear easily given their predominantly structural nature.

The persistence of very large current account imbalances at this early stage of the recovery may also complicate the outlook. The combination of large public and external deficits in the United States could be a source of exchange rate instability, given the potentially short-run nature of much of the international capital currently flowing in. Under such delicate circumstances, a sudden weakening of the dollar could stifle a fledgling European recovery. This would exacerbate the unevenness of the global upturn, while not doing much to help reduce current account imbalances or tensions in the trade policy arena.

These various imbalances and sources of vulnerability are largely inherited from past policy mistakes. This is especially true of fiscal policies which often failed to take advantage of “good times” to replenish public coffers and have led to exceedingly large deficits after several years of economic slowdown. With ageing-related financial pressures looming larger than ever, taking advantage of the economic upswing to restore the sustainability of public finances will be crucial. The challenge will be, for many countries, to fight fiscal complacency during a period of sustained growth, in marked departure from the repeated failures of the past two decades.

To succeed in this difficult endeavour, it will be necessary to re-establish or revitalise long-term oriented fiscal frameworks and to improve fiscal institutions so as to prevent the reappearance of pro-cyclical fiscal policies and to enhance the cost-effectiveness of public expenditures in a context where competing claims are on the rise. Given the magnitude of the challenge, a special dossier is devoted to these medium-term fiscal issues in the forthcoming full edition of this Economic Outlook.

It will be equally crucial to draw lessons from the very uneven ability of OECD countries to withstand adverse economic shocks. Performance gaps are often too large to be ascribed exclusively to differences in macroeconomic policies or idiosyncratic shocks. Strikingly divergent performance within the European Union in recent years reflects unequal degrees of resilience in the face of shocks, as well as marked differences in potential growth rates. Both are clearly linked to structural policies, where a lot of work remains to be done over the coming “good years” so as to raise potential growth rates and living standards, and to strengthen OECD countries to weather the next economic slowdown.

References

OECD (2003), Economic Outlook, No. 74, November 2003 (preliminary edition), available at www.oecd.org/eco

OECD (2003), Economic Outlook, No. 73, June 2003.

©OECD Observer No 240/241, December 2003




Economic data

GDP growth: +0.6% Q2 2018 year-on-year
Consumer price inflation: 2.9% Aug 2018 annual
Trade: +2.7% exp, +3.0% imp, Q4 2017
Unemployment: 5.3% Aug 2018
Last update: 10 Oct 2018

E-Newsletter

Stay up-to-date with the latest news from the OECD by signing up for our e-newsletter :

Twitter feed

Suscribe now

<b>Subscribe now!</b>

To receive your exclusive paper editions delivered to you directly


Online edition
Previous editions

Don't miss

  • Globalisation will continue and get stronger, and how to harness it is the great challenge, says OECD Secretary-General Gurría on Bloomberg TV. Watch the interview here.
  • OECD Secretary-General Angel Gurría with UN Secretary-General António Guterres at the 73rd Session of the UN General Assembly, in New York City.
  • The new OECD Observer Crossword, with Myles Mellor. Try it online!
  • Watch the webcast of the final press conference of the OECD annual ministerial meeting 2018.
  • Listen to the "Robots are coming for our jobs" episode of The Guardian's "Chips with Everything podcast", in which The Guardian’s economics editor, Larry Elliott, and Jeremy Wyatt, a professor of robotics and artificial intelligence at the University of Birmingham, and Jordan Erica Webber, freelance journalist, discuss the findings of the new OECD report "Automation, skills use and training". Listen here.
  • Do we really know the difference between right and wrong? Alison Taylor of BSR and Susan Hawley of Corruption Watch tell us why it matters to play by the rules. Watch the recording of our Facebook live interview here.
  • Has public decision-making been hijacked by a privileged few? Watch the recording of our Facebook live interview with Stav Shaffir, MK (Zionist Union) Chair of the Knesset Committee on Transparency here.
  • Can a nudge help us make more ethical decisions? Watch the recording of our Facebook live interview with Saugatto Datta, managing director at ideas42 here.
  • The fight against tax evasion is gaining further momentum as Barbados, Côte d’Ivoire, Jamaica, Malaysia, Panama and Tunisia signed the BEPS Multilateral Convention on 24 January, bringing the total number of signatories to 78. The Convention strengthens existing tax treaties and reduces opportunities for tax avoidance by multinational enterprises.
  • Rousseau
  • Do you trust your government? The OECD’s How's life 2017 report finds that only 38% of people in OECD countries trust their government. How can we improve our old "Social contract?" Read more.
  • Globalisation’s many benefits have been unequally shared, and public policy has struggled to keep up with a rapidly-shifting world. The OECD is working alongside governments and international organisations to help improve and harness the gains while tackling the root causes of inequality, and ensuring a level playing field globally. Please watch.
  • Checking out the job situation with the OECD scoreboard of labour market performances: do you want to know how your country compares with neighbours and competitors on income levels or employment?
  • Trade is an important point of focus in today’s international economy. This video presents facts and statistics from OECD’s most recent publications on this topic.
  • The OECD Gender Initiative examines existing barriers to gender equality in education, employment, and entrepreneurship. The gender portal monitors the progress made by governments to promote gender equality in both OECD and non-OECD countries and provides good practices based on analytical tools and reliable data.
  • Interested in a career in Paris at the OECD? The OECD is a major international organisation, with a mission to build better policies for better lives. With our hub based in one of the world's global cities and offices across continents, find out more at www.oecd.org/careers .
  • Visit the OECD Gender Data Portal. Selected indicators shedding light on gender inequalities in education, employment and entrepreneurship.

Most Popular Articles

OECD Insights Blog

NOTE: All signed articles in the OECD Observer express the opinions of the authors
and do not necessarily represent the official views of OECD member countries.

All rights reserved. OECD 2018