Wednesday, December 22, 2010

OECD: Euro Area Economic Survey (GDP Charts) "Recovery is now underway but will be muted"


OECD Economic Survey of Euro Area (December 13, 2010)

OECD Euro Area Economic Survey: "Recovery is now underway but will be muted"

Quick Review The Organisation For Economic Co-Operation And Development has issued an Economic Survey for the Euro Area, the first since January, 2009. Overall, the OECD lists many actions and reforms needed by the Euro Area and forecasts a gradual economic recovery. The OECD headlined the Survey on their website more emphatically, "Urgent action needed to restore stability" and noted "major reforms are now needed to restore confidence and stability". The Economic Survey presents both a history of how the Euro Area arrived at the current crisis situation and then presents many advised actions and reforms. In a companion presentation to the Survey, "Imbalances in the Euro Area: Fiscal, Financial, and Structural Policies to Restore Stability", Chief Economist and Deputy Secretary-General Pier Carlo Padoan "forecasts the recovery to gain strength":
* Immediate recovery by trade and stock-building
* The recovery is now broad-based: consumption expanding for a year and investment picking up
Forecasts growth of 1.5% to 2% over the next years, gradually accelerating
* Inflationary pressures will remain weak
* Unemployment will remain above 9% over the next two years

Survey Summary The summary categories for the Survey Summary recap the major areas reviewed by the OECD and the related advised actions and reforms:
* Exiting from the crisis. A modest recovery is now underway, although risks remain. Financial conditions have strengthened. Activity has picked up, but the recovery is likely to be muted. Fiscal consolidation is necessary, although it may drag on growth in the short term.
* Resolving intra-euro area imbalances. Large current account deficits and surpluses in euro area countries in the run up to the crisis were associated with underlying economic, financial and fiscal imbalances.
* Avoiding unsustainable imbalances. A new cross-cutting approach to economic and financial management is required to stabilise national economies more effectively.
* Rebuilding the public finances. The fiscal position has deteriorated sharply, leading to large deficits and adding to already high debt levels in some euro area countries.
* Improving fiscal discipline. Many euro area governments failed to use economic good times to consolidate.
* Strengthening the banking system. Weaknesses in financial regulation and supervision created an environment prone to excessive risk-taking and unsustainable credit cycles in the euro area, as in other OECD economies.
* Managing cross-border risks. Close but incomplete banking integration in the euro area, together with the absence of a single EU system of bank regulation and supervision, created risks and complicated the resolution of cross-border difficulties.

Assessment and Recommendations The OECD then reviews how the Euro Area arrived at this economic situation and advised actions and reforms. The chapter headings are:
* The crisis is the first major test of the resilience of the euro area
* Large-scale government intervention supported the banking system
* Fiscal policy helped to cushion the downturn but the public finances are now in poor shape
* Monetary policy has provided stimulus
* The governance of the euro area could be strengthened
* Large imbalances in some euro area countries created problems
* Structural measures can help reduce imbalances
* A cross-cutting approach is needed to avoid harmful imbalances
* Surveillance and oversight of imbalances should be stepped up
* Fiscal discipline needs to be improved
* National fiscal frameworks should be stronger
* Stronger bank regulations are needed for financial stability
* Weaknesses in cross-border supervision remain a risk

OECD Economic Outlook In a previous
post [OECD: Economic Recovery Underway, Slower Than Expected (Video, Charts) *Challenge is self-sustained growth*], the OECD Economic Outlook (November 2010) presented GDP growth projections for Euro Area. These are included below.

OECD: GDP Growth Projections by Quarter (Chart) Below is the OECD GDP Growth Projections by Quarter for the USA, Japan, the Euro Area, and the entire OECD. These are annualized percentage growth rates. The chart is for 10 quarters, from Q3 2010 through Q4 2011. The USA lowest quarter is +1.9% in Q4 2010 (now) and the highest is +3.7% in Q4 2012 (2 years from now). The Japan lowest quarter is +0.6% in Q2 2011 and the highest is +2.7% in Q1 2011 (next quarter). The Euro Area lowest quarter is +1.3% in both Q4 2010 (now) and Q1 2012 (next quarter). The highest quarter is +2.2% in both Q3 2012 and Q4 2012 (2 years from now). The Total OECD lowest quarter is +1.7% in Q4 2010 (now) and the highest is +3.2% in Q4 2012 (2 years from now). No negative GDP quarters are projected nor on the graph.

OECD: GDP Growth Projections by Quarter (Chart) Below is the OECD GDP Growth Projections by Year for the USA, Japan, the Euro Area, and the entire OECD. These are annual percentage growth rates. The chart is for 3 years: 2010, 2011, and 2012. The USA is a lackluster +2.7% for 2010, dips to a mediocre +2.2% in 2011, and then increases to flat +3.1% in 2012.  Japan is a healthy +3.7% in 2011, dropping to a worsening +1.7% in 2012, and dropping even further to discouraging +1.3% in 2012. The Euro Area is a mediocre +1.7% in 2011, continues a flat +1.7% in 2012, and increases slightly to an ongoing mediocre +2.0% in 2012. The Total OECD is a reasonable +2.8% in 2011, dropping to a mediocre +2.3% in 2012, and rebounding to a disappointing +2.8% in 2012.

Economic Outlook Commentary The OECD statement said it all, "the challenge will be to guide the transition from a policy-driven recovery to self-sustained growth". That is, from government intervention, especially fiscal stimulus and quantitative easing, and hence increases in sovereign debt and ongoing debasements of currencies, to self-sustaining, growing economies. The USA and UK are of especial note facing this dilemma. The OECD GDP Growth Projections are hopefully low or this will be a protracted, and somewhat painful, recovery in the next 2 years. A GDP growth rate of +3.0% is considered "break-even" for employment - some jobs are being created but economic, and employment, growth is not robust. Based on this premise, the USA muddles along and achieves break-even in 2012, Japan and the Euro Area have problems ahead, and the Total OECD continues just below break-even. Overall, these projections are not positive or encouraging.

Euro Area Economic Survey
Official Summary by the Organization for Economic Co-Operation and Development

The euro area has experienced a severe recession, followed by a sovereign debt crisis in some euro area countries, in the wake of the global financial crisis. This was the first major test of the robustness of the euro area in a downturn. Swift monetary policy easing, massive intervention to support the financial system and supportive fiscal policy helped to stabilise the financial system and mitigate the contraction in private demand.

Excessive economic, financial and fiscal imbalances built up in some euro area countries during the upswing, hindering the efficient operation of the monetary union, and led to growing vulnerabilities. These contributed to especially severe economic and fiscal crises in some countries, leading to spillovers mainly through financial markets across the euro area.

Exiting from the crisis. A modest recovery is now underway, although risks remain. Financial conditions have strengthened. Activity has picked up, but the recovery is likely to be muted. Fiscal consolidation is necessary, although it may drag on growth in the short term. As soon as upward risks to price stability in the medium term emerge, monetary policy stimulus should be withdrawn. Non-standard measures should continue to be wound down in line with improvements in the monetary policy transmission mechanism. It is essential that the banking system is restored to good health and remaining weaknesses resolved. The stress test exercise carried out at the EU level in 2010 was an important step forward, which has increased transparency and reinforced the credibility of the euro area financial sector. Structural reforms would facilitate on-going economic adjustment and lift growth prospects.
About the OECD

The OECD has 33 member countries, including the USA and Japan but not China and Russia. OECD brings together the governments of countries committed to democracy and the market economy from around the world to:
Support sustainable economic growth
Boost employment
Raise living standards
Maintain financial stability
Assist other countries' economic development
Contribute to growth in world trade
The Organisation provides a setting where governments compare policy experiences, seek answers to common problems, identify good practice and coordinate domestic and international policies.

The 33 OECD member countries are: Australia, Austria, Belgium, Canada, Chili, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Israel, Italy, Japan, (South) Korea, Luxembourg, Mexico, Netherlands, New Zealand, Norway, Poland, Portugal, Slovak Republic, Slovenia, Spain, Sweden, Switzerland, Turkey, United Kingdom, United States, plus the Euro Area and European Union. Accession countries are Estonia and Russian Federation. Enhanced Engagement Economies are Brazil, China, India, Indonesia, and South Africa. Some Non-Member Economies are also assessed by the OECD.

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