Economic growth has picked up in the world’s advanced economies, but this is being trumped by the fact that growth in emerging markets is slowing, says the Organization for Economic Cooperation and Development (OECD).
In its latest economic assessment, the OECD says that growth “is proceeding at encouraging rates in North America, Japan and the UK”. It says that the euro area is out of recession, but that output remains weak in a number of countries.
However, growth has also slowed in some of the large emerging economies, it says. Rising global bond yields have “fuelled market instability and capital outflows in a number of major emerging economies, such as India and Indonesia,” it says.
And, as the emerging economies now account for a large share of the global economy, their slowdown “points to sluggish near-term growth globally”, it says.
For Canada, the OECD says that economic growth “is projected to strengthen through 2013 and 2014, driven by business investment, which will benefit from low capital costs, still high commodity prices and improving confidence. External demand will also contribute, thanks to expanding US and non-OECD markets and a depreciating exchange rate.” It sees 1.4% growth this year, and 2.3% next year.
“Household spending will be supported by easy monetary policy yet restrained by tightening mortgage rules and deleveraging. A consolidating public sector will slow growth as well,” it adds.
Monetary policy will have to become less expansionary by the latter half of 2014 to contain inflationary pressures, it says. “In the meantime, any aggravation of housing price pressures should be addressed by further prudential measures. Fiscal consolidation should continue as planned, but the automatic stabilisers should be allowed to operate,” it says.
“The gradual pick-up in momentum in the advanced economies is encouraging but a sustainable recovery is not yet firmly established,” said OECD deputy chief economist, Jorgen Elmeskov. “Major risks remain. The euro area is still vulnerable to renewed financial markets, banking and sovereign debt tensions. High levels of debt in some emerging markets have increased their vulnerability to financial shocks. And a renewal of brinkmanship over fiscal policy in the US could weaken confidence and trigger new episodes of financial turmoil.”
“Continued support for demand is still needed to make sure recovery takes hold, and it remains vital that this be complemented by structural reforms to boost growth, rebalance the global economy and avoid a ratcheting-up of structural unemployment,” Elmeskov added.
The OECD says that tackling high unemployment is crucial and must be a key focus of government action. Unemployment rates are still far above pre-crisis levels in the U.S. and Europe, and it says, “to avoid high rates getting entrenched even as a recovery takes hold governments must implement effective training and activation policies, backed by support for stronger demand.”
“Reforming tax-benefit systems should improve work incentives while targeted measures are needed for vulnerable groups such as jobless young people outside the training and education system,” it adds.
The OECD also says that public finances have been improving in most advanced economies, with the exception of Japan, but that fiscal consolidation policies must continue. “Such policies need to be better designed, however, to protect the most vulnerable in society, to build public support for necessary structural reforms and to prioritise spending to help get people back to work,” it says.