The OECD warns that the Euro area is still at risk

Sep 25 • Between the lines • 2385 Views • Comments Off on The OECD warns that the Euro area is still at risk

There are several organizations, who comment on macro economic policy and when they do publish their thoughts and predictions we should all sit up and pay attention. The OECD, The Organisation for Economic Cooperation and Development, is amongst that elite rank of organizations given that they have an unerring ability to predict economic performance correctly. Moreover, they haven’t come over all ‘giddy-like’ regarding the supposed fragile global recovery, which are accusations many analysts are firmly laying at the feet of organisations such as Markit Economics, whose latest publications appear to be further away from the reality the majority of global citizens are experiencing, as austerity (or growing pains) stifle growth and their personal development.

In its latest observations, on the state of Europe, the organisation highlights the blight of unemployment as a critical issue for many of the ravaged countries in Europe and all the 34 member states of its organisation.

From time to time its worth archiving the various recent statements made by the OECD, as rather than being a state of an individual nation synopsis, they provide more of a state of the global economy synopsis.

In early September the OECD stated that global growth is set to remain sluggish and whilst the recovery in developed economies has strengthened, many emerging economies have slowed significantly. The OECD stated that activity was expanding in areas such as North America, Japan and the UK at “encouraging rates”. However, the OECD warned that difficulties in the emerging economies, such as the BRICS, continued to drag down global growth.

The OECD said that growth in the second quarter of 2013 in the major advanced economies was stronger than expected. Overall in 2013, the OECD forecasts US growth of 1.7%, ahead of Japan with 1.6% and 1.5% growth in the UK. Further it stated that the US Federal Reserve should gradually taper the rate of its stimulus programme, whilst continuing to keep policy interest rates low.

The OECD said that while the eurozone was no longer in recession it remained extremely vulnerable. There are many eurozone banks who were insufficiently capitalised and burdened by bad loans. It forecasts that Germany’s economy will grow by 0.7% during 2013, and France by just 0.3%. It expects the Italian economy to shrink by 1.8% during the same period.

However, China’s growth rate is set to recover in the second half of 2013, although the pace of growth will not return to previous highs of circa 9%. The OECD expects it to grow 7.4% this year.

“Growth in China has seemingly already passed the trough and looks set to recover further in the second half of 2013, although the expansion is still expected to be more subdued than in earlier cycles.”

The organisation also noted the difficulties being experienced in emerging economies, partly caused by fears that the US is to scale back its quantitative easing programme. As emerging economies have contributed to economic dynamism in recent years, the OECD said, these difficulties means global growth is likely to remain sluggish.

Ireland

The OECD recently praised Ireland, held up by European leaders as the ‘poster child’ for austerity, for its “steadfast commitment” to its €85bn (£71.5bn) bail-out programme. The OECD suggested that Ireland was now on the verge of becoming the first European nation to successfully exit its financial rescue put in place since the financial crisis took hold. They believe it can successfully return to the debt markets by the end of 2013. The OECD stated that Ireland’s debt-to-gross domestic product ratio was approaching a “turning point” and would soon begin to fall from its record high of 125pc of GDP, or €204bn.

Angel Gurria, OECD secretary general;

“Ireland will soon have done most of the heavy lifting to bring its public debt on a downward trend. Indicators all point to recovery taking place now, and this gives us all confidence that economy is on the mend.”

However, the OECD warned that the country still had to do more to address Ireland’s 13.8pc unemployment rate, whilst its debt levels were amongst the highest in the OECD’s 34 member states. It stated action is needed to bring down Ireland’s unemployment rate and that it should focus on retraining young, mostly male, workers, many of whom worked in the construction sector before the crisis. Failure to do so would result in a “lost generation of young talent”.

According to the OECD, the number of jobs in their Irish construction sector collapsed from 60,000 in 2007 to just 5,000 in the third quarter of 2012. Jobs in the services sector almost halved to 90,000 over the same period. The OECD stated that the banks’ strategy on non-performing loans, where lenders choose to grant repayment holidays to struggling borrowers rather than take those losses on their balance sheets, was hindering their return to health. This had undermined confidence in the banks and limited their access to funding;

“which in turn means that credit supply conditions, especially for SMEs, remain amongst the tightest in Europe. It welcomed a framework announced this March which sets out targets for problem loans to be dealt with on a “sustainable basis”.

Eurozone still on the critical list

Despite all the subdued optimism, the OECD’s chief economist Pier Carlo Padoan said at a press conference in Lisbon on Tuesday that the Eurozone continues to be “a considerable source of risk” for the global economy. He projected that the area would return to positive growth only in 2014, even though many EU countries were already experiencing a recovery.

Padoan urged EU governments to make the fight against unemployment their top priority in 2014. He also said that the global economy was gradually coming out of recession, but that it was still far from sustainable growth.