3rd September 2009, WSJ Blogs : Real Time Economics, blogs.wsj.com
The Organization for Economic Cooperation and Development Thursday said the global economy is emerging from its worst slump since Second World War faster than it had forecast only three months ago. Why the change? Here is the OECD’s rundown below.
1. Economic news has been mostly favourable over the past few months:
Falls in the cost of money market funding, a narrowing of corporate bond spreads, a rebound in equity markets and a moderation in the tightening of bank lending standards have contributed to a marked improvement in overall financial conditions. Nonetheless, bank lending continues to decline and concerns about the health of the banking system remain.
The housing markets in the United Kingdom and the United States show some signs of stabilisation, both as regards prices and turnover.
The inventory adjustment underway since the beginning of the year appears to have progressed to a point where inventory changes may no longer be a drag on growth and could add to it in the near term. Similarly, global trade appears to have reached a trough and is poised to accelerate as the economic recovery gathers strength and broadens in scope.
In the large emerging-market economies, which were not directly concerned by the meltdown in financial markets, the recovery in economic activity that began earlier this year is gaining momentum. Notably in China, GDP is estimated to have risen by over 14 per cent (saar) in the second quarter and activity continues to pick up, supported by the substantial fiscal stimulus and rapid increases in bank lending. GDP growth in other Asian emerging-market economies has also strongly rebounded, partly in response to policy stimulus.
2. Given the positive economic news and based on incoming high-frequency indicators, OECD short-term forecasting models point to an earlier recovery than envisaged a few months ago (see table opposite). As a consequence, the unprecedented rate of deterioration in labour market conditions witnessed over the past year should ease. Nonetheless, numerous headwinds imply that the pace of the recovery is likely to be modest for some time to come. Ample spare capacity, low levels of profitability, high and rising unemployment, anaemic growth in labour income and ongoing housing market corrections will moderate any uptick in private demand. At the same time, the need remains for households, businesses, financial institutions and governments to repair the damage to their balance sheets.
3. Substantial spare capacity and the collapse in commodity prices until mid-year have led to negative or zero headline inflation in all major economies. Increased economic slack has also damped somewhat measures of underlying inflation and will continue to act as a brake on inflation. Nonetheless, since inflation expectations remain well anchored and given the recent rebound in commodity prices, the risk of sustained deflation appears to be small outside Japan.
4. Substantial slack combined with the prospect for a weak recovery, implies that strong policy stimulus will continue to be needed in the near term. Regarding monetary policy, taking the first steps towards normalisation of policy interest rates from their current exceptionally low levels should in most cases and on current prospects wait until well into 2010 and in some cases even beyond. It is also important that central banks communicate their intentions explicitly, if conditionally, so as to affect interest rates at longer maturities more effectively. On fiscal policy, it is important that announced stimulus measures be implemented promptly. However, the possibility of a recovery taking hold a little sooner than envisaged only a few months ago diminishes the likelihood that further fiscal stimulus will be needed in those countries having scope for such action. Looking further ahead, OECD countries need to prepare for the removal of the exceptional degree of support afforded by current monetary and fiscal policy stances. In this regard, preparing credible exit strategies and fiscal consolidation plans now, even if actual implementation will only commence later, is desirable.
See the full report here.