The Global Economic Outlook:

Stronger growth ahead, but more risks

 Paris, 19th November 201311h00 Paris time

Pier Carlo Padoan

Deputy Secretary-General and Chief Economist

OECD Economic Outlook: key messages

1. Global growth should pick up if major risks do not materialise.

2. Downside risks prevail. Negative spillovers from emerging economies could be stronger than before.3. Emerging economies need to address vulnerabilities to improve resilience and tackle the slowdown in potential growth.

4. The United States should avoid fiscal brinkmanship.

5. In Japan, all three “arrows” of the government’s strategy should be implemented fully.

6. The euro area must repair the banking system and rebalance demand to reduce unemployment.

2

Global growth should pick up if major risks do not materialise…

Summary of growth projections

3

Note: The upward (green) arrow means that the growth in the current year is higher than in the previous year. Real GDP growth and world trade growth (the arithmetic average of world merchandise import and export volumes) are seasonally and working-day adjusted annualised rates.

Source: OECD Economic Outlook database 94.

2012 2013

World 3.1 2.7 3.6 3.9OECD 1.6 1.2 2.3 2.7Non-OECD 5.1 4.8 5.3 5.4United States 2.8 1.7 2.9 3.4Euro area -0.6 -0.4 1.0 1.6Japan 1.9 1.8 1.5 1.0China 7.7 7.7 8.2 7.5World trade growth 3.0 3.0 4.8 5.9

2014 2015

Growth prospects remain strongest in the emerging economies

Projected change in real GDP in 2014-15Annual average, per cent

1. BRIICS countries comprise Brazil, China, India, Indonesia, Russia and South Africa.

Source: OECD Economic Outlook database 94.

4

IDN

CHL

TUR

ISR

EST

NZL

NOR

ISL

RUS

CHE

GBR

LUX

AUT

DEU

CZE

BEL

JPN

PRT

GRC

SVN

IDN

CHL

TUR

ISR

EST

NZL

NOR

ISL

RUS

CHE

GBR

LUX

AUT

DEU

CZE

BEL

JPN

PRT

GRC

SVN-1

0

1

2

3

4

5

6

7

8

-1

0

1

2

3

4

5

6

7

8

BRIICS1

Euro area countries

Other OECD member countries

… but the outlook is somewhat less positive than it appeared in May…

Growth forecast almost unchanged for the OECD…

… but significantly weaker for many emerging economies with the exception of China.

Comparison of growth projections from May and November Economic Outlooks

1. BRIICS countries comprise Brazil, China, India, Indonesia, Russia and South Africa.

Source: OECD Economic Outlook database 93 & 94.5

2011 2012 2013 20141

2

3

1

2

3OECD

May 2013 Outlook

November 2013 Outlook

2011 2012 2013 20144

6

8

4

6

8BRIICS1

May 2013 OutlookNovember 2013 Outlook

… with forecast revisions varyingacross countries

Change in 2014 real GDP growth projection between May and November Economic OutlooksPercentage points

1. BRIICS countries comprise Brazil, China, India, Indonesia, Russia and South Africa.

Source: OECD Economic Outlook database 93 & 94.

6

IRL

ISL

USA

ESP

ITA

CHE

PRT

LUX

GRC

AUTIRLBELISL

CANUSAMEXESPJPNITA

NZLCHEFRAPRTPOLLUXHUNGRCGBR

-2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0

BRIICS1

Euro area countries

Other OECD member countries

The current recovery is still weak by past standards…

Note: The point labelled “t” on the horizontal axis corresponds to the pre-recession peak quarter for each cycle.

Source: OECD National Accounts database.

OECD-wide real GDP, relative to pre-recession peakPer cent

7

-5

0

5

10

15

20

-5

0

5

10

15

201970s; Peak at 1974Q3 1980s; Peak at 1981Q31990s; Peak at 1990Q4 2000s; Peak at 2008Q1

… with a striking slowdown in world trade growth…

1. Trade and GDP both in volume terms, in 2005 prices.

Source: OECD National Accounts database, CPB World Trade Monitor.

World trade/GDP1

Per centWorld trade volumes

2007 = 100

8

2005

2006

2007

2008

2009

2010

2011

2012

2013

80

100

120

80

100

120

1990

1991

1993

1995

1997

1998

2000

2002

2004

2005

2007

2009

2011

2012

10

15

20

25

30

10

15

20

25

30

Trend (1990-2...

… which also reflects particular weakness in investment…

OECD-wide fixed investmentVolume, 2007 = 100

Note: Fixed investment values are the weighted average of OECD member countries, where the weights are GDP measured at 2005 PPP USD.

Source: OECD Economic Outlook 94 database, OECD Foreign Direct Investment (FDI) Statistics.

World FDI flowsIndex of USD values, 2007 = 100

9

2004

2005

2006

2007

2008

2009

2010

2011

2012

75

80

85

90

95

100

105

75

80

85

90

95

100

105

2004

2005

2006

2007

2008

2009

2010

2011

2012

0

20

40

60

80

100

120

0

20

40

60

80

100

120

… credit has lagged in the major economies…

Bank loans to non-financial private sector2007 = 100

10

80

85

90

95

100

105

110

Euro area United States Japan

Note: Major OECD economies is calculated as the weighted average of the indices (2007 = 100) of nominal bank credit to the non-financial private sector for the United States, the euro area and Japan, where the weights are GDP in 2007 measured at USD PPP.

Source: Datastream and European Central Bank.

80

85

90

95

100

105

110

Major OECD economies

… and which has resulted in stubbornly high unemployment,

especially in Europe Unemployment rate

Per cent

Source: OECD national accounts database, OECD Economic Outlook 94 database, and Eurostat.

11

OECD-wide unemploymentMillions of persons

2008

2008

2009

2009

2010

2010

2011

2011

2012

2012

2013

20

25

30

35

40

45

50

55

20

25

30

35

40

45

50

55

2008

2009

2010

2011

2012

2013

0

2

4

6

8

10

12

14

0

2

4

6

8

10

12

14

United States Euro area Japan

Recent financial turbulence is one reason for the less positive outlook

• limited impact to date on major OECD economies

• significant effects on some emerging economies

The fallout from the discussion of tapering of asset purchases by the

Federal Reserve in May is the main negative

development since the last Outlook

Emerging market bond index1

May 1, 2013 = 100

1. JP Morgan EMBI+.

Source: OECD Economic Outlook 94 database, Datastream.

12

80

85

90

95

100

105

80

85

90

95

100

105

FOMC delays taper

Bernanke state-ment on tapering

Emerging economies with large current account deficits were

worst-hit

1. Based on daily information from April 30 to November 15, 2013.

Note: Latest 4-quarter period is Q3 2012 – Q2 2013.

Source: OECD Economic Outlook 94 database; Datastream; and IMF Balance of Payments database.

Maximum rise in long-term yields from May 2013

13

-8 -6 -4 -2 0 2 40.0

1.0

2.0

3.0

4.0

5.0

2.83999991416931

1.71000003814697

1.97300004959106

3.46799993515015

0.999000012874603

2.44700002670288

4.09999990463257

2.09999990463257

Current account balance last 4 quarters, in % of GDP

Maxim

um

incre

ase

in l

ong-t

er-

min

tere

st r

ate

s¹,

in %

pts

Downside risks prevail. The recovery path is likely to be

turbulentSignificant risks remain from incomplete resolution of fiscal, financial and structural weaknesses since the crisis.

Recent instability was a reminder of how risks can derail the central scenario for growth and employment.

A tapering of US Federal Reserve asset purchases may bring a renewed bout of instability.

Underlying fragilities in all the major economies could be exposed by the realisation of one or more prominent risks.

14

Negative spillovers from emerging economies could be stronger than

beforeA deeper slowdown in EMEs would have negative feedback effects on advanced economies.

Some advanced economies have tight trade and financial links with EMEs, and would be significantly affected.

First-year impact on growth of a 2% decline in domestic demand in non-OECD countries excluding China

Source: OECD Economic Outlook 94 database; and OECD calculations.

15

-1.0

-0.5

0.0

-1.0

-0.5

0.0

Perc

enta

ge p

oin

ts

United States: exit from unconventional monetary policy will

be challengingUS monetary policy should remain accommodative, balancing uncertainty about the evolution of demand and employment with the costs of postponing exit.

As growth strengthens, bond purchases should be wound down. When that process is complete, the Federal Reserve should start to raise policy interest rates towards a more neutral stance.

16

... as will dealing with the taper elsewhere

In vulnerable EMEs, the US taper may aggravate policy dilemmas, with a reversal of capital inflows weakening activity.

Where inflation is already high and the central bank’s credibility is in question, interest rates may have to be higher to anchor inflation expectations.

US taper will also put upward pressure on interest rates in advanced countries, notably the euro area. This is another reason why strengthening bank balance sheets is an urgent priority.

17

Addressing the risk of fiscal deadlock in the United States

Polarised politics and the nominal debt ceiling create risks not only for the US but the whole world.

The nominal debt ceiling should be abolished.

Mechanistic and arbitrary short-term consolidation measures should be replaced by a coordinated medium-term plan.

18

If the US debt ceiling were to bind,a new global recession could be

triggered

Note: Government consumption reduced by 5% of GDP in 2014. Term premium in long-term interest rates up by 200 b.p. in 2014 in the USA. Equity prices drop by 25% in 2014 in all countries. Short-term interest rates and nominal exchange rates held fixed. Source: OECD Economic Outlook 94 database, and OECD calculations.

Change relative to baseline in first year if debt ceiling were to bind for one yearPercentage points

19

United States

Euro area

Japan

China

OECD

World

-8 -7 -6 -5 -4 -3 -2 -1 0GDP growth

United States

Euro area

Japan

China

0 0.5 1 1.5 2 2.5 3Unemployment

United States

Euro area

Japan

China

OECD

-1.6 -1.4 -1.2 -1.0 -0.8 -0.6 -0.4 -0.2 0.0Inflation

Japan’s fiscal challenges remain massive…

1. The average measure of consolidation is the difference between the underlying primary balance in 2014 and the average underlying primary balance between 2015 and 2030, except for those countries for which the debt target is only achieved after 2030, in which case the average is calculated up until the year that the debt target is achieved.

Source: OECD calculations.

Consolidation requirements to reduce government debt to 60 per cent of GDP by 20301

Percentage points of GDP

20

AUT

DEUIT

ABEL

NLD

EA15HUN

ISR

CANFIN

FRAESP

IRL

OECDGRC

PRTUSA

GBRJP

N

-2

0

2

4

6

8

10

12

-2

0

2

4

6

8

10

12

… and must be tackled decisively

• The second planned increase, to 10% in 2015, should go ahead on schedule.

• Any package to soften the growth impact of the tax increases should be focussed on one-time measures with high multipliers.

• A detailed and credible plan to achieve the target of primary balance by 2020 is needed.

• Structural reform to boost growth should be implemented quickly.

The 2014 rise in the

consumption tax is just the first step to

putting public debt on a

sustainable path.

21

Preventing another euro area crisis

The recent ECB rate cut is welcome, but further easing may be required if deflation risks intensify.

The Asset Quality Review and stress tests must be implemented rigorously – and followed up by bank recapitalisation where needed.

Further progress must be made on establishing a fully fledged banking union with an adequate joint fiscal backstop. The date for an effective single bank resolution regime should be brought forward.

22

Euro area countries hardest-hit by the crisis have made progress on structural

reform…Responsiveness rates to Going for Growth recommendations, 2011-121

1. Responsiveness rates are calculated as the share of priority areas identified in Going for Growth 2011 in which 'significant' action was taken in 2011-12. The euro area and OECD rates are calculated as an unweighted average.

Source: OECD Going for Growth 2013.

23

Greec

e

Irelan

d

Portu

gal

Spain

Italy

OECD

Franc

e

Germ

any

0.0

0.5

1.0

0.0

0.5

1.0

…which is assisting with internal rebalancing…

Contributions to improvement in net exports since 2007-081

In per cent of 2007-08 euro area GDP1

1. The values shown are the changes between Q4 2007 – Q3 2008 and Q3 2012 – Q2 2013.

Source: OECD Economic Outlook 94 database.

Greece Ireland Italy Portugal Spain-0.5

0.0

0.5

1.0

1.5

-0.5

0.0

0.5

1.0

1.5

Fall in imports Rise in exports Change in net exports

… although that adjustment needs to be more symmetric

25

Current account balance/GDPPer cent, 4-quarter moving average

Source: OECD national accounts database.

2007

2008

2009

2010

2011

2012

2013

-20

-15

-10

-5

0

5

10

-20

-15

-10

-5

0

5

10

DEU GRC ITA PRT ESP

Summing up

26

The global economy looks set to move beyond its post-crisis sluggishness, but there are still prominent downside risks.

There is no room for complacency. Policy makers should avoid creating turbulence and stand ready to mitigate instability.

Successful growth strategies require a strong commitment to structural reforms in advanced and emerging market economies alike.

Policy priorities at the international level include trade, investment and financial reform.

More information

27

www.oecd.org/economy/economicoutlook.htm