Interesting article from the newswires, I cannot agree more!
PARIS--The uncertain future of U.S. fiscal and central bank policies poses a
growing risk to a global economic recovery that has already been weakened by a
slowdown in growth in many developing economies, the Organization for Economic
Co-operation and Development said Tuesday.
In its twice-yearly Economic Outlook report, the Paris-based research body
said the U.S. debt ceiling should be abolished, and replaced by "a credible
long-term budgetary consolidation plan with solid political support."
The report marks a significant shift in the OECD's focus of concern, which in
recent years has been centered on the euro zone's attempts to tackle its fiscal
and banking crises. While the OECD remains worried about the euro zone's
frailties, the most immediate threats to the global recovery now appear to come
from the U.S.
The OECD said a series of events has undermined confidence and stability in
recent months, including the "surprisingly strong" reaction by investors to the
possibility that the Federal Reserve will soon start to reduce its
asset-purchase program. That led to related concerns about developing economies,
and was followed by a "potentially catastrophic" crisis precipitated by
negotiations over the U.S. debt ceiling.
"These events underline the prominence of negative scenarios and risks that
the recovery could again be derailed," OECD chief economist Pier Carlo Padoan
said.
The heightened risks from the U.S. are in addition to continued ones from a
fragile euro-zone banking sector and Japan's fiscal situation, the OECD said.
The warnings came as the OECD forecast only a modest economic recovery
through 2015. The combined economies of the 34 members of the OECD will grow
1.2% this year, before accelerating to 2.3% in 2014 and 2.7% in 2015, according
to its forecasts.
Growth rates between major economies will continue to differ markedly with
the euro zone contracting 0.4% this year before growing 1% next year, while the
U.S. will grow 1.7% and 2.9% over the same periods.
The twice-yearly economic outlook is slightly weaker than in May, mainly
because of an expected slowdown in some large developing economies that partly
reflects their vulnerability to capital outflows when the Federal Reserve does
eventually start to reduce its stimulus program.
"The turmoil following the tapering discussions in mid-year has revealed how
sensitive some emerging market economies are to U.S. monetary policy," the OECD
said.
The OECD cut its 2014 growth forecast for Brazil to 2.2% from 3.5% in May,
its forecast for India to 4.7% from 6.7%, and its forecast for Indonesia to 5.6%
from 6.2%. It cut its growth forecast for China more modestly to 8.2% from 8.4%,
still leaving it above that of many other economies.
The research body said the weaker growth outlook for some developing
economies was more deeply rooted in "long-standing structural impediments that
had been hidden by abundant capital inflows." Solutions to those problems vary
from country to country, but generally developing economies need more formal and
efficient labor markets and stronger, market-based financial systems, Mr. Padoan
said.
Largely as a result of its more downbeat assessment of the outlook for large
developing economies, the OECD cut its forecast for global gross domestic
product growth by around 0.5 percentage points this year and next to 2.7% and
3.6%, respectively.
The OECD said that even if it creates turbulence and damages other economies,
the Federal Reserve should nonetheless wind down its asset purchases next year
if unemployment continues to fall and inflation strengthens, and start to raise
its benchmark interest rate in 2015.
"Over the medium-to-long term, the costs of excessive liquidity are rising.
Tapering has to begin at some stage," Mr. Padoan said.
The OECD also stressed the dangers arising from the U.S. debt ceiling. If the
ceiling became binding--a fate narrowly avoided in October--the U.S. economy
would be catapulted into a deep recession, according to the think tank's
analysis.
Even if such a scenario were to be avoided, the ongoing negotiations will
still be damaging.
"The continuous affair of discussing debt every few months is simply
detrimental to confidence levels and therefore growth," Mr. Padoan said.
In the euro zone, weak bank balance sheets and fragile public finances could
still unsettle financial markets, the OECD said. The euro-zone swiftly must
correct any capital shortfalls it finds in its banks, as a banking sector in
disrepair could easily get out of control, Mr. Padoan said.
The OECD also acknowledged that there is an increased risk of deflation in
the euro-zone and welcomed the recent cut in the European Central Bank's main
refinancing rate to 0.25%.
"If the deflationary risks increase, the ECB should be prepared to do more,
including having negative deposit rates and buying more assets on the secondary
market," Mr. Padoan said.
The OECD also added its voice to recent criticism of Germany's role in
helping to rebalance the euro zone's economy, noting that while southern
European nation have trimmed their trade gaps, "much less adjustment, if any, is
taking place in surplus countries."
"More durable and symmetric adjustment is needed through reforms to labor and
product markets, including liberalization of services in Germany that would
strengthen and rebalance demand," Mr. Padoan said.
The OECD said that in Japan, "strong" efforts to cut the budget deficit are
needed to slow the pace at which the government's debt is rising.
"In view of the extraordinarily high public debt ratio, a more detailed and
credible medium-term consolidation plan is required to maintain confidence in
government finances," the OECD said.
Write to William Horobin at william.horobin@wsj.com and Paul Hannon at
paul.hannon@wsj.com
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(END) Dow Jones Newswires
November 19, 2013 05:25 ET (10:25 GMT)