Pace of global recovery weaker than forecast: OECD

“The recovery is real, but at a slow speed, and there may be turbulence on the horizon,” said OECD secretary-general, Angel Gurría. “There is a risk of another bout of brinkmanship in the U.S., and there is also a risk that tapering of asset purchases by the U.S. Federal Reserve could bring a renewed bout of instability.”

“The exit from non-conventional monetary policy will be challenging, but so will action to prevent another flare-up in the euro area and to ensure that Japan’s growth prospects and fiscal targets are achieved,” Gurría added.

Nevertheless, the group is forecasting that gross domestic product (GDP) growth within the OECD will be 1.2% this year, accelerating to 2.3% in 2014, and 2.7% in 2015. For the world economy overall, it sees 2.7% growth this year, accelerating to 3.6% in 2014, and 3.9% in 2015. “The pace of the global recovery is weaker than forecast last May, largely as a result of the worsened outlook for some emerging economies,” it notes.

For Canada, growth is projected to strengthen through 2014 and 2015, rising from 1.7% this year to 2.3% next year and 2.7% the year after that, led by exports and business investment, the OECD says. “Residential investment is likely to weaken since the housing stock seems greater than underlying demand,” it notes.

“Projected growth should be enough to absorb the small degree of remaining excess capacity by end-2015, and the inflation rate should increase to near the 2% target rate,” it says. And so, it sees the Bank of Canada starting to withdraw monetary stimulus starting in late 2014 in order to counter inflationary pressures.

“Should house-price pressures re-emerge, further macro-prudential measures may be needed to reduce risks to financial stability. Fiscal consolidation should continue as planned at both the federal and provincial levels of government,” it says.

The OECD forecasts that growth in the United States will reach 2.9% in 2014 and 3.4% in 2015. In Japan, GDP is expected to drop to 1.5% growth in 2014, and 1% rate in 2015. The euro area is expected to see a gradual recovery, with growth of 1% in 2014 and 1.6% in 2015.

It notes that growth has begun picking up in China, but says it will remain weaker than previously projected in most other major emerging market economies. “A group of emerging OECD member countries – Chile, Turkey, Mexico, Korea and Israel – will continue out-pacing growth in other advanced economies,” it says.

Along with the risks from the U.S. political situation, and the need to normalize monetary policy, the report also points to a range of other downside risks to its outlook, including: the slowdown in world trade growth, foreign direct investment flows, and fixed investment; and, stubbornly high unemployment, particularly in Europe.

It welcomes the recent European Central Bank rate cut, adding that further easing may be required if deflation risks intensify. It also calls for rigorous implementation of the planned asset quality review and stress tests of European banks, followed by bank re-capitalization, where needed; and further progress toward banking union.

“Growth since the global crisis has been uneven and hesitant, while job creation has been even more disappointing,” said OECD chief economist, Pier Carlo Padoan. “Clear and credible strategies are needed for how jobs and growth will be created and public finances restored. This will require a strong commitment to structural reforms in advanced and emerging market economies alike.”