OECD growth outlook highlights significant downside risks

“Advanced economies are gaining momentum and driving the pick-up in global growth, while once-stalled cylinders of the economic engine, like investment and trade, are starting to fire again,” said OECD secretary-general, Angel Gurría.

Among the major advanced economies, the OECD says that the recovery is best established in the U.S., which is projected to grow by 2.6% in 2014 and 3.5% in 2015. Canada is forecast to grow by 2.4% in 2014 and 2.8% in 2015. The euro area is expected to return to positive growth after three years of contraction, gaining just 1.2% in 2014 and 1.7% in 2015. In Japan, growth is expected to hover at 1.2% in 2014 and 2015, it says.

The so-called BRIICS countries (Brazil, China, India, Indonesia, Russia and South Africa) are projected to see GDP growth of 5.3% this year on average and 5.7% in 2015, the OECD says. China is expected to lead the way with growth of just below 7.5% in 2014 and 2015.

The outlook also highlights significant downside risks. It notes that while investment and trade are both showing signs of picking up, growth will remain moderate. And, although financial conditions are improving in the advanced economies, it warns that tighter credit and supply side bottlenecks are damping growth in emerging economies.

Unemployment also remains a major concern. While jobless rates have begun falling from the historic levels seen in the wake of the crisis, the OECD says that more than 44 million people are projected to still be out of work across the OECD area at end-2015, which is 11.5 million more than before the crisis.

“With the world still facing persistently high unemployment, countries must do more to enhance resilience, boost inclusiveness and strengthen job creation. The time for reforms is now: we need policies that spur growth but at the same time create opportunities for all, ensuring that the benefits of economic activity are broadly shared,” Gurría said.

To further strengthen the recovery, the OECD recommends that monetary policy must remain accommodative, especially in the euro area, where it suggests that a further interest rate reduction is warranted, given low and falling inflation. In Japan, asset purchases should continue as planned, it suggests. In the U.S., the OECD says that asset purchases by the U.S. Federal Reserve Board should be gradually phased out in 2014 and policy rates should start to be raised during 2015.

For Europe, the OECD said it is urgent to improve the health of the banking sector, including the establishment of a banking union along with further reforms, such as recapitalisation, or, if necessary, resolution.

Additionally, “more ambitious structural reform programmes are needed to create jobs and boost growth in advanced and emerging countries alike”, it says.