PARIS (MNI) – Following are the comments of OECD chief economist
Pier Carlo Padoan in the interim economic outlook presented Thursday:
Recent high-frequency indicators point to a slowdown in the pace of
recovery of the world economy that is somewhat more pronounced than
previously anticipated. Against this background and according to the
OECD short-term forecasting models, growth could slow in the G7
economies to an annualised rate of about 1 per cent in the second half
of the year. There is nevertheless great uncertainty in the outlook
arising from a combination of weaknesses and strengths. In particular:
Private consumption growth may be constrained by additional
adjustments by households to the balance-sheet losses suffered during
the recession and in response to housing market developments, should
house prices weaken further. In addition, uncertainty about unemployment
could put a damper on the expansion of private consumption. A weak
economy and uncertainty in sovereign debt markets might also affect
adversely the financial system and private demand growth through
deleterious feedback mechanisms.
As for strengths, the components of demand that drive the economy
during cyclical downturns and upturns, such as private investment, are
already at very low levels in relation to GDP. This, coupled with robust
corporate profits, would indicate that investment is unlikely to weaken
further in the coming months. In addition, inventories are at close to
their desired levels, suggesting that a renewed rundown of stocks would
be unlikely in the near term. Moreover, although different financial
markets have moved in different directions, overall financial conditions
in OECD countries have stabilised, although some indicators warrant
caution, including the cost of insurance against default, which remains
high for banks. Growth remains robust in the large emerging-market
economies.
As regards inflation, headline measures have picked up somewhat in
most major OECD economies due to rising commodity prices and, in some
countries, price-level adjustments following indirect tax increases.
Nevertheless, underlying inflation rates have continued to moderate,
albeit relatively slowly, given the large excess capacity that remains
in labour and product markets. Near-term expectations indicate a
continued moderation of underlying inflation in most of the major OECD
economies. Inflationary pressures have surfaced in some of the large
emerging-market economies, prompting a tightening of monetary policy.
It is not yet clear whether the loss of momentum in the recovery is
temporary as implied by the balance of strengths and fragilities
discussed above or whether it signals greater underlying weaknesses in
private spending at a time when policy support is being removed.
If the ongoing slowdown is temporary, the appropriate policy
response would be to postpone the withdrawal of monetary support for a
few months, while maintaining planned budget consolidation to address
unsustainable fiscal positions. Market conditions allowing, the
automatic stabilisers should be allowed to work unimpeded around the
planned consolidation path.
On the other hand, if the slowdown reflects longer-lasting forces
bearing down on activity, additional monetary stimulus might be
warranted in the form of quantitative easing and commitment to
close-to-zero policy interest rates for a long period. Where public
finances permit, planned fiscal consolidation could be delayed
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