OECD sees gradual US-led recovery despite euro zone weakness

Friday, 7 November 2014 00:01 - - {{hitsCtrl.values.hits}}

Reuters: The global economy is only gradually picking up momentum as stagnation in the euro zone and growing weakness in some big emerging economies weighs on the U.S.-led recovery, the OECD said on Thursday. With the euro zone a stubborn weak spot in the global economy, the OECD called on the European Central Bank to live up to a promise “to do whatever it takes” to revive its economy and begin purchasing government bonds. The ECB holds its latest policy-setting meeting on Thursday. The Paris-based Organisation for Economic Cooperation and Development updated its outlook ahead of a summit next week in Australia of leaders from the Group of 20 economic powers. It is to provide a more complete outlook and analysis on Nov. 25. Marginally trimming estimates dating from May, the OECD forecast that the world economic growth would accelerate from growth of 3.3% this year to 3.7% next year and 3.9% in 2016. “The global economy is continuing to run in low gear,” the OECD’s new chief economist, Catherine Mann of the United States, told Reuters in an interview. “Even though we are looking at global growth to increase up to 3.9% by the end of 2016, that still leaves us about a half a percentage point below our historical experience.” The OECD forecast the US economy would see growth speed up from 2.2% this year to 3.1% next year as an improving job market gives private spending a boost. Firming US growth warranted a gradual increase in the Federal Reserve’s interest rates from the middle of next year, the OECD said, warning however that hikes could trigger turbulence in emerging markets. The improving US outlook contrasted sharply with the euro zone, which was forecast to see growth of only 0.8% before accelerating to 1.1% next year despite a slower pace of belt-tightening in many countries. With the euro area at risk of a “prolonged period of stagnation”, the OECD called on the ECB to launch a full-scale US-style quantitative easing drive. Though ECB chief Mario Draghi has promised to do whatever it takes to stabilise the euro zone economy, the ECB has so far stopped short of buying government bonds as the US Federal Reserve did and the Bank of Japan is doing amid internal tensions over how to ease policy. “The strategy of purchasing sovereign bonds is a challenge with the structure and rules governing the ECB’s approach,” Mann said in an interview. “But if you are going to say you need to do whatever it takes we need to think about that.” Turning to Japan, the OECD said the Bank of Japan should push ahead with its exceptional monetary stimulus, which was stepped up last week, until the central bank gets inflation higher on a permanent basis. With ultra-loose monetary policy seen weakening the yen and thus boosting exports, the OECD forecast the Japanese economy would accelerate from growth of 0.9% this year to 1.1% next year. Amid reports a planned sales tax hike next year may get postponed, Mann recommended sticking to plan as it would encourage consumers to bring forward spending. Among major emerging economies, the OECD estimated China’s growth would slow from 7.3% this year to 7.1% in 2015 as it rebalances towards more service-sector focused growth from an export-dominated economy. But the outlook diverged widely among big emerging economies that have driven growth until recently with commodity-focused countries suffering as oil and other raw material prices fall. Brazil’s economy was seen eking out growth of only 0.3% this year before accelerating to 1.5% in 2015, while growth in Russia’s sanctions-hit economy was expected to fall from 0.7% to zero in 2015.