OECD: Clouds hang over emerging markets

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Rintaro Tamaki1

Reuters.

OECD Deputy Secretary-General Rintaro Tamaki.

Paris - Setbacks for emerging markets and rising risks of fallout from the Ukraine crisis are holding back the global economic recovery, the OECD said on Tuesday.

The global economy is now set to grow by 3.4 percent this year, it forecast, trimming its outlook by 0.2 points.

The organisation held its forecast that the world economy would grow by 3.9 percent next year.

Central banks, including the European Central Bank, must go on shoring up growth, the Organisation for Economic Cooperation and Development said.

And governments should beware of pushing too fast to straighten out their finances.

The OECD said the events in Ukraine had increased geopolitical uncertainty, “with the downside risk that this could have a significant adverse impact on growth, especially in many Central and Eastern European economies.”

“The near-term outlook is for global activity and world trade to strengthen gradually through the rest of this year and 2015,” it said in its semi-annual Economic Outlook report.

“However, still-high unemployment in many countries and the subdued pace of growth in many emerging market economies relative to past norms are likely to limit the momentum of the recovery,” said the OECD.

Although the eurozone has perked up, the OECD trimmed its forecasts for US growth after a bitter winter. Higher taxes in Japan and tighter credit conditions in China were also slowing growth.

The OECD raised its forecast for eurozone growth by 0.2 points to 1.2 percent this year, and sees growth accelerating to 1.7 percent in 2015.

It trimmed its US growth forecast this year by 0.3 points to 2.6 percent this year due the harsh winter, but the OECD sees growth picking up throughout the rest of this year and rising to 3.5 percent in 2015.

It trimmed by 0.3 points its forecast for Japanese growth this year to 1.2 percent, and the OECD expects the same growth rate in 2015.

Despite an improving overall economic outlook, the OECD said that the balance of risks to the global economy were still on the downside.

The head of economic research at the OECD, Christian Kastrop, commented that the “real problem area for the outlook is high unemployment” in various parts of the world, although the job situation in the United States was much better.

The eurozone was “lagging” behind in terms of recovery and the OECD was recommending that the European Central Bank should reduce its key interest rate from 0.25 percent to zero and a possible “switch to a nominal negative rate” for overnight deposits with it.

Addressing widespread concern that inflation has fallen too low in the eurozone, he said that “we do not see an emerging deflationary spiral” and did not think the ECB needed to enact unconventional stimulus measures now.”

Kastrop said that credit was expanding “hugely” in emerging markets and had to be watched “very carefully”, adding that in China shadow banking products “already count for close to 40

percent of GDP (output) in 2013.)

The report pointed to uncertain prospects in China due to the credit tightening and the fragility of the banking system, further turbulence in emerging markets as the United States winds down its monetary stimulus programme, and greater geopolitical risks due to Ukraine.

The OECD cut its forecast for Chinese growth this year by 0.8

percentage points to 7.4 percent owing to tighter credit conditions, and its sees similar growth of 7.3 percent next year.

Investors have been preoccupied with slowdown in China, the world's second-largest economy.

Of particular concern has been the fragility of the banking sector, after the rapid increase in lending that has fuelled growth in past years.

The OECD warned that similar rapid increases had “presaged financial crises for advanced countries in the past”.

This “raises concerns about credit quality and financial stability, especially as economic growth looks set to be weaker in the coming years than in the past five years.”

The report said that a Chinese banking crisis could have considerable international repercussions, with other emerging markets in the region likely to be hit hardest.

The OECD, a policy forum for 34 advanced democracies, urged central banks to keep interest rates low to support growth.

It singled out the European Central Bank, which holds a policy meeting this week, to lower interest rates from their record low 0.25 percent and take other actions to avert the risk of deflation.

OECD Deputy Secretary-General Rintaro Tamaki called on the ECB “to be ready for additional non-conventional stimulus...”

Eurozone inflation picked up to 0.7 percent in April from 0.5 percent the previous month, but is far below the ECB's target of just under 2.0 percent. - Sapa-AFP


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