Global recovery set for 4.2 percent 2011 growth

November 18, 2010
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, PARIS, Nov 18 – The global recovery shows signs of easing on slowdown in emerging economies but remains on track for 4.6-percent growth this year, dipping to 4.2 percent in 2011, the OECD said on Thursday.

Many countries must work harder and faster to cut budget deficits next year and some may have room to offest this for a while with even cheaper money.

But exceptionally low interest rates cannot last, the Organisation for Economic Cooperation and Development warned.

The United States should consider continuing relaxed monetary conditions for the next few years, it said but also insisted that in general in leading economies "monetary policy must gradually return to a more normal stance."

It suggested that globally, sometime in 2012 exceptional stimulus measures should be on the way out.

A broad risk "relates to the very low levels of long-term interest rates in major OECD economies," it said in its six-month review of the world economy.

"The current levels of long-term rates are difficult to reconcile with the projection of a mild but sustained recovery."

Radical action to correct national finances will pay dividends in the medium term, the report said, playing down the risk that widespread corrections would have dire effects on growth.

But it also warned at length of dangers in long-lasting exceptionally low rates, notably on sovereign debt markets. One danger was that easy money was causing a problematic flow of funds into emerging economies and currencies.

However, there were signs that some foreign exchange movements were in line with a correction of global payments imbalances. Set against this, it warned: "Global imbalances remain wide, and in some cases have started widening again, and there are rising concerns that they may threaten the recovery."

Global imbalances — massive trade surpluses in exporters such as China and massive deficits in importers like the United States — have stoked fears of a currency war as each side devalues its money to gain an advantage.

The OECD noted that such "unilateral action" risked "triggering protectionist moves."

The report was published in the midst of the second eurozone debt crisis in six months with bond rates for Irish and Portuguese debt at near record high levels and a big difference between best and worst eurozone bond yields.

Eurozone rules for controlling overspending should be tightened, the OECD said.

And controversially, it suggested that a rescue fund for eurozone countries in trouble "could be made a permanent feature of the euro area." This was an indirect reference to market tension over what will happen when the rescue scheme, set up after the Greek crisis, ends in 2013.

Overall, growth in the OECD industrialised countries is likely to ease next year and then pick up in 2012 but this will require careful management as governments rein in anti-crisis stimulus measures to allow market forces back to work.

The OECD warned too of "significant risks to the downside," among them high debt levels, weak US and UK housing markets and the possibility that low interest rates, including the rates at which governments borrow, could rise suddenly.

The OECD left its 2010 global growth forecast unchanged from its last forecast in May at 4.6 percent, and said growth would dip to 4.2 percent next year and then rise to 4.6 percent in 2012.

It downgraded the 2010 US estimate to 2.7 percent from 3.2 percent but upgraded the Euro area to 1.7 percent from 1.2 percent.

Japan will do well this year with growth of 3.7 percent, up from the previous estimate of 3.0 percent, but then fall away sharply to 1.7 percent in 2011 and 1.3 percent in 2012.

For the 33 OECD countries as a whole, growth was put at 2.8 percent for 2010, falling to 2.3 percent next year and then back to 2.8 percent in 2012.

The OECD warned that governments, having borrowed heavily to fund stimulus measures to get through the crisis, must now cut debt down.

The cost, however, will be high — the equivalent of 8.0 percent of gross domestic product in the United States and Japan to stabilise debt ratios by 2025.

It will take an adjustment of 5.0-6.0 percent in Britain, Portugal, Slovakia, Poland and Ireland, it added.

"Implementing decisive and credible fiscal consolidation would avoid the risk of a vicious circle linking higher debt ratios to higher risk premia and lower growth and would instead promote higher growth and a virtuous circle," OECD chief economist Pier Carlo Padoran said in the report.

"Robust growth will also require a decisive acceleration of structural reform, which has slowed during the global recession," Padoran said.

Structural reforms also have a role to play in addressing global imbalances — increased welfare in surplus countries, for example, might reduce the need for traditionally high savings rates, giving domestic consumption a boost.

The United States, which charges that Beijing keeps the yuan undervalued so as to gain an unfair trade advantage, has long argued for just such a course in China.

In turn, deficit countries could be more open to direct investment from their surplus partners, helping to rebalance their relationship — something which Beijing has called for from Washington.

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