Policy can brighten the economic outlook

This time it's different - Click to enlarge

After five years of crisis, the global economy is weakening again. In this we are not facing a new pattern. Over the recent past, signs of emergence from the crisis have more than once given way to a renewed slowdown or even a double-dip recession in some countries. The risk of a new major contraction cannot be ruled out. A recession is ongoing in the euro area, the US economy is growing but below what was expected earlier this year, and a slowdown has surfaced in many emerging market economies.

The weaker outlook has several causes. A significant drop in confidence is a key driver. Efforts at deleveraging public and private debt and reining in government budgets have had a particularly strong impact on our economies, while weaker global trade adds to the gloom. High unemployment is further depressing confidence and spending. Slow and ineffective policy responses have not helped the situation.

Yet, a strong policy response using every policy tool available can turn the downside scenario around and secure more sustainable growth. However, failure to take such action could push the global economy back into recession. What can be done? For a start, the monetary policy stance of several economies should be further eased, particularly in the euro area, Japan and some emerging market economies, including China and India. In the US, policy, which has already been eased, is now at an appropriate level and should be held there, given weak inflation prospects and the slow growth in jobs.

On the fiscal front, countries should avoid going too far too quickly, as any knock-on effects on the wider economy are likely to be large. US budgetary tightening should proceed at a more measured pace to avoid the “fiscal cliff” that current legislation implies.

In the euro area, structural budgetary tightening should be limited to current fiscal commitments, and automatic stabilisers be given full leeway around this. To maintain credibility, European governments should announce this commitment in a coordinated fashion. Underlying budget trends are already improving in many euro area countries and debt-to-GDP ratios will start to fall in the coming years, which would in turn bolster confidence.

In Japan, a detailed and credible medium-term fiscal consolidation programme needs to be established. There, the high level of debt limits the room for manoeuvre, and could prevent automatic stabilisers from working properly in the event of a shock.

What if downside risks materialised? First, central banks should provide greater liquidity injections, purchasing private sector financial assets and possibly additional quantitative easing, though being careful to end any unconventional measures as soon as the worst is over. Temporary fiscal stimulus should be provided by countries with robust budgetary positions, particularly Germany and China. Other economies may have to ease up on their budgetary tightening plans.

As to structural reforms, these should be fully implemented, as they could begin delivering sooner than expected in terms of higher growth, better employment performance and more balanced current accounts.

Putting in place strong institutions, such as independent fiscal councils, or drawing up credible fiscal rules, can reassure markets and provide additional support. Moreover, progress towards a fully fledged banking union in the euro area is essential.

The global nature of the current slowdown is a reminder of how interdependent our world has become. Policymakers must take spillovers and transmission channels more seriously on board, particularly in the G20, when addressing global imbalances and the impact of monetary policies on capital flows and exchange rates.

Our common policy challenge is to guide the global economy forward on a new long-term path. This requires departing from the pre-crisis business-as-usual approaches. In addition to repairing the financial system, we must find ways to ensure environmental sustainability and tackle rising inequality. Though potential trade-offs will have to be better measured, new sources of growth, such as green energy and innovation in knowledge-based intangible assets, must play a more central role in the future.

For more on OECD Economic Outlook No 92, visit www.oecd.org/eco/economicoutlook.htm

Visit www.oecd.org/economy/ and www.oecd.org/governance/

Order it at www.oecd.org/bookshop

©OECD Observer No 293, Q4 2012




Economic data

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

  • 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.
  • How do the largest community of British expats living in Spain feel about Brexit? Britons living in Orihuela Costa, Alicante give their views.
  • Brexit is taking up Europe's energy and focus, according to OECD Secretary-General Angel Gurría. Watch video.
  • OECD Chief Economist Catherine Mann and former Bank of England Governor Mervyn King discuss the economic merits of a US border adjustment tax and the outlook for US economic growth.
  • Africa's cities at the forefront of progress: Africa is urbanising at a historically rapid pace coupled with an unprecedented demographic boom. By 2050, about 56% of Africans are expected to live in cities. This poses major policy challenges, but make no mistake: Africa’s cities and towns are engines of progress that, if harnessed correctly, can fuel the entire continent’s sustainable development.
  • OECD Observer i-Sheet Series: OECD Observer i-Sheets are smart contents pages on major issues and events. Use them to find current or recent articles, video, books and working papers. To browse on paper and read on line, or simply download.
  • How sustainable is the ocean as a source of economic development? The Ocean Economy in 2030 examines the risks and uncertainties surrounding the future development of ocean industries, the innovations required in science and technology to support their progress, their potential contribution to green growth and some of the implications for ocean management.
  • 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.
  • They are green and local --It’s a new generation of entrepreneurs in Kenya with big dreams of sustainable energy and the drive to see their innovative technologies throughout Africa. blogs.worldbank.org
  • 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 .

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 2017