Unspectacular recovery

Chief Economist, OECD

Editorial of the 2003 OECD Economist Outlook, with forecasts and analysis for 30 OECD countries plus selected non-OECD countries, first semester 2003, preliminary (electronic) version, OUT NOW! See links below. 

Since we published our previous OECD Economic Outlook, six months ago, growth in the OECD has proved disappointing. The US recovery is still fragile and somewhat weaker than expected, while economies in the euro area have undershot an already modest forecast by a wide margin.

In Japan, volatile movements in exports and investment have not broadened into a genuine recovery. There are many reasons for this new bout of economic weakness and evaluating their respective importance is no easy task.

Worries about oil prices, anxiety in the face of war, fear of terrorism and epidemics, loss of confidence in international governance… The list of the so-called geopolitical and psychological factors is long. And their role in the recent waning of business and consumer confidence is indeed quite palpable. Nonetheless, despite their overwhelming presence in the public debate, these elements of turbulence should not overshadow some important economic issues that will shape the world recovery. The brisk reconstruction of Iraq and good progress towards a more secure world would obviously help, but they will not translate into a robust recovery unless enough underlying economic momentum has been regained. This momentum depends, in turn, on how far OECD economies have purged past imbalances (over-investment, inflated share prices, balance sheet exposure…), and how much support is being provided by economic policies.

Despite the prevailing uncertainties and the current weakness in activity, this Outlook still sees a progressive if unspectacular world recovery as the most likely scenario. While a relapse into recession cannot be totally ruled out, it remains a low-probability outcome.

This sluggish but by no means catastrophic scenario is based on a careful assessment of the current balance of risks. Looking at recent geopolitical developments, it appears that the most acute source of risk has now receded. With the ending of war and securing of Iraqi oil fields, the threat of an oil crisis sending the world economy into outright recession has subsided. However, the more diffuse perception of a still insecure economic environment may prevail for some time, prolonging wait-and-see attitudes in the areas of investment and spending on major consumer durables.

On the economic front, some of the obstacles that previously stood in the way of a recovery have been progressively lifted. This is particularly true of business spending. In the United States, the initial capital overhang has been largely eliminated and investment has stabilised, thereby removing a hugely negative contribution to growth. Business spending is now better placed to take over the baton from consumers. In Europe, inventories are generally seen as light and may play a useful role in restarting the economy. More generally, fiscal and monetary conditions across the OECD remain accommodating enough to support an incipient recovery.

On a less positive note, household demand will probably take some time to accelerate in a context where wage earners are still worried about adverse labour-market developments and home owners, in the United Kingdom and the United States in particular, may face downward corrections in housing markets

©OECD Observer April 2003

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