Economic growth perspectives weakening as recovery slows

Growth remains strong in most emerging economies, albeit at a more moderate pace.

Economic recovery appears to have come close to a halt in the major industrialised economies, with falling household and business confidence affecting both world trade and employment, according to new analysis from the OECD. Growth remains strong in most emerging economies, albeit at a more moderate pace.

“Growth is turning out to be much slower than we thought three months ago, and the risk of hitting patches of negative growth going forward has gone up,” OECD Chief Economist Pier Carlo Padoan said during a presentation of the OECD’s latest Interim Economic Assessment.

Economic growth in the G7 economies excluding Japan will remain at an annualised rate of less than 1% in the second half of 2011.

The debate over fiscal policy in the United States, the sovereign debt crisis in some countries of the euro area and the fact that governments have fewer options to boost growth are driving both business and consumer confidence downward. The extent of bank deleveraging, due to the impact of regulatory changes, may also have been underestimated.

Earlier improvements in the labour market are now fading, hiring intentions are softening and there are greater risks that high unemployment could become entrenched.

On the upside, a number of OECD countries are taking serious fiscal and structural reform measures, which should boost confidence. President Obama's announcement later today is expected to provide a boost to job recovery in the United States.

Japanese growth is expected to be buoyed by the ongoing reconstruction efforts following the earthquake and tsunami. Inflation may have peaked in emerging markets, which will allow for some policy easing. Investment levels in many OECD countries remain well below historical averages, offering the possibility for renewed corporate spending in the coming months if uncertainty abates.

“The policy imperative is to rebuild confidence,” Mr. Padoan said.

The OECD recommends that central banks keep policy rates at present levels, and barring signs of recovery, consider lowering rates when there is scope.

Other monetary policy responses to the crisis could include further central bank interventions in securities markets, strong commitments to keeping interest rates low over an extended period and the withdrawal of monetary tightening in emerging economies.

On the fiscal side, the OECD says that to rebuild confidence it is essential that countries take credible steps to curtail debt. Medium-term consolidation plans, however, must be accompanied by growth-friendly structural reforms. Credible fiscal frameworks may create room for short term fiscal stimulus if needed. The governance of the euro area in economic and fiscal matters must be improved. The process of capitalisation of banks should be accelerated, and support to their short-term funding needs should be addressed.

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