OECD Forecasts Global Economy to Recover Next Year

The organization's chief economist expects growth in U.S., Japan, and euro zone, despite mounting "reform fatigue."

The Organization for Economic Cooperation and Development forecasts global economic growth will accelerate in 2014, with both the U.S. and Japan continuing to outpace the euro area.

“The global economy is moving forward and it is doing so at multiple speeds,” OECD Chief Economist Pier Carlo Padoan said in the Paris-based organization’s semi-annual Economic Outlook. Differing monetary and fiscal choices across the major developed economies are driving regional divergence with “each path carrying its own mix of risks,” he said.

Global central banks are continuing to try to bolster their economies, with the Federal Reserve buying $85 billion of debt a month and the Bank of Japan unveiling unprecedented stimulus last month. In the euro region, where the European Central Bank cut its benchmark rate to a record low this month, the OECD said, “more can be done through further non-conventional measures.”

The OECD sees U.S. gross domestic product rising 1.9 percent this year and 2.8 percent in 2014, while Japan’s will increase 1.6 percent and 1.4 percent. The euro-area economy will shrink 0.6 percent this year before expanding 1.1 percent next, according to the report.

In a separate release yesterday, German unemployment rose more than economists forecast in May as the euro-region debt crisis and a long winter took their toll on Europe’s largest economy. The number of people out of work climbed 21,000 to 2.96 million. Economists predicted an increase of 5,000, according to the median of 35 estimates in a Bloomberg News survey.

Some Optimism

The OECD, which advises its 34 member governments on economic policy, sounded a more optimistic note than in recent reports, praising the U.S. for having “repaired” its financial system, welcoming Japan’s shift to a more stimulative monetary policy and noting that public debt levels in many euro-area countries will soon start to decline given the fiscal effort made over “several years.”

Combined growth across OECD countries will accelerate to 2.3 percent next year from 1.2 percent this year. China, which isn’t a member of the OECD, will expand 8.4 percent in 2014 after growth of 7.8 percent this year, according to the report.

Still, Padoan warned of risks related to the 17-nation currency zone, saying that rising unemployment is the “most pressing challenge” and that countries in the region with trade surpluses such as Germany need to allow wages to rise.

The euro-region jobless rate probably rose to 12.2 percent in April from 12.1 percent in March, economists said before a report on May 31.

 

‘Reform Fatigue’

“Protracted weakness could evolve into stagnation with negative implications for the global economy,” he said. “Reform fatigue is mounting as visible results in growth and jobs fail to materialize.”

For the U.S., the challenge will be how to unwind stimulus. Fed Chairman Ben S. Bernanke and some colleagues disagree about when to curtail bond buying, with Bernanke stressing this month that a premature exit risks hampering growth.

The OECD said an early withdrawal by the Fed “could jeopardize the fragile recovery, but waiting too long could result in a disorderly exit from the program.”

Speaking more broadly, Padoan said protracted monetary easing “may lead to excessive risk taking, bubbles, and resource misallocation.”

“Exit from unconventional monetary policy, when needed, may be difficult to manage and less smooth than desirable, possibly leading to sharp rises in bond yields and serious negative consequences for growth,” he said.

In Asia today, the Bank of Thailand cut its benchmark interest rate for the first time this year as slowing economic growth bolstered government calls for easing. The one-day bond repurchase rate fell by a quarter of a percentage point to 2.5 percent. In reports elsewhere, Japan’s retail sales fell 0.1 percent in April from a year earlier, while South Korea had a current account surplus of $3.97 billion last month.

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