News Flash! OECD: Decisive Action Required Quickly to Avoid Massive Economic Disruption, a Credit Crunch and a Global Recession

Lorimer Wilson November 19, 2011 Comments Off on News Flash! OECD: Decisive Action Required Quickly to Avoid Massive Economic Disruption, a Credit Crunch and a Global Recession 2,653 Views

Decisive policies must be urgently put in place to stop the euro area sovereign debt crisis from spreading and to put weakening global activity back on track. [If not we can expect to see a] massive escalation in economic disruption, an increase in the risk of a credit crunch [and] the global economy tipping into a recession. Words: 834

So says the OECD (www.oecd.org) in an article* regarding their latest Economic Outlook report.

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The article goes on to say, in part:

The euro area crisis remains the key risk to the world economy, the Outlook says. Concerns about sovereign debt sustainability are becoming increasingly widespread. If not addressed, recent contagion to countries thought to have relatively solid public finances could

massively escalate economic disruption
increase the risk of a credit crunch [from increased] pressures on bank funding and balance sheets
tip the economy into a recession that monetary policy could do little to counter.

OECD Chief Economist Pier Carlo Padoan reported that:”Prospects only improve if decisive action is taken quickly. In the euro area, the risk of contagion needs to be stemmed through a substantial increase in the capacity of the European Financial Stability Fund, together with a greater ability to call on the European Central Bank’s balance sheet. Much greater firepower must be accompanied by governance reforms to offset the risk of moral hazard.”Improved prospects would also depend on the enactment of a credible medium-term fiscal programme in the United States.

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The Outlook’s baseline scenario assumes that policy-makers take sufficient action to avoid:

disorderly sovereign defaults,
a sharp credit contraction,
systemic bank failures and
excessive fiscal tightening

and sees:

GDP across the OECD countries slowing from 1.9% this year to 1.6% in 2012, before recovering to 2.3% in 2013
unemployment in the OECD area remaining high for an extended period, with the jobless rate staying at around 8% through the next two years.

Mr. Padoan went on to say:

“We are concerned that policy-makers fail to see the urgency of taking decisive action to tackle the real and growing risks to the global economy. We see:

the US growth recovering only slowly,
the euro area entering into mild recession and
Japan growing faster because of reconstruction, but this boost is temporary and will fade away.”

GDP is projected:

in the U.S., to rise by 2.0% in 2012 and by a further 2.5% in 2013, after an expected expansion of 1.7% this year,
in the Euro area, to slow down from 1.6% this year to 0.2% next year, before picking up to 1.4% in 2013,
in Japan, to expand by 2% in 2012 and 1.6% in 2013, following a contraction of 0.3% in 2011, which reflects the impact of the earthquake and tsunami and subsequent reconstruction activity and
in China to ease to 8.5% in 2012, from 9.3% this year, before climbing back to 9.5% in 2013. Weaker activity in China and other emerging-market economies together with modest falls in commodity prices should put inflation in these countries on a downward trend, allowing some easing of monetary policy.

World growth will be sustained by the non-OECD countries
Contribution to annualised quarterly world real GDP growth, percentage points

Source: OECD Economic Outlook 90 database. Download the underlying data in Excel

Under the baseline scenario, weak activity, low levels of inflation and predominantly downside risks:

should trigger strongly accommodative monetary policy in OECD countries [with] central banks providing ample liquidity to calm tensions in financial markets and prepare contingency plans that could be implemented swiftly, if needed, but
could trigger an alternative, downside scenario where the outlook becomes much bleaker if there is a continued lack of effective action. This scenario could be prompted by a worsening of existing concerns about the banking system, contagion in euro-area sovereign debt markets or an excessively tight fiscal policy in the United States linked to the current political gridlock.

In the Strategic Response section of its Outlook, the OECD:

identifies country-specific policies that should be implemented if the macroeconomic situation derails,
[advises that] the financial sector must be stabilised,
[advises that] the social safety net [must be] protected,
[advises that] monetary policy [must be] eased further and
[recommends,] where feasible, [that] governments provide fiscal support while strengthening fiscal frameworks to reassure markets that public finances can be brought under control [and that] under this scenario, a wide range of structural measures to boost jobs and economic activity, all desirable in their own right, will become urgent…[to avoid the risk of unemployment] turning from cyclical to structural, thereby sapping potential growth, hitting confidence and weakening public finances.

*http://www.oecd.org/document/47/0,3746,en_21571361_44315115_49095919_1_1_1_1,00.html

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