OECD cuts global growth forecast to 3.4% for 2014

The global economy will strengthen over the coming two years, but urgent action is still required to further reduce unemployment and address other legacies from the crisis, according to the OECD’s latest Economic Outlook.

“Advanced economies are gaining momentum and driving the pick-up in global growth, while once-stalled cylinders of the economic engine, like investment and trade, are starting to fire again,” OECD Secretary-General Angel Gurría said while launching the Outlook during the Organisation’s annual Ministerial Council Meeting and Forum in Paris.

“But with the world still facing persistently high unemployment, countries must do more to enhance resilience, boost inclusiveness and strengthen job creation. The time for reforms is now: we need policies that spur growth but at the same time create opportunities for all, ensuring that the benefits of economic activity are broadly shared,” Mr Gurría said (read the full speech).

GDP growth across the 34-member OECD is projected to accelerate to a 2.2% rate in 2014 and 2.8% in 2015, according to the Outlook. The world economy will grow at a 3.4% rate in 2014 and 3.9% in 2015.

Among the major advanced economies, recovery is best established in the United States, which is projected to grow by 2.6% in 2014 and 3.5% in 2015. The euro area will see a return of positive growth after three years of contraction: 1.2% in 2014 and 1.7% in 2015. In Japan, growth will be dented by the launch of much-needed fiscal consolidation measures, and is expected to hover at 1.2% in 2014 and 2015.

The BRIICS  (Brazil, China, India, Indonesia, Russia and South Africa) are projected to see GDP growth of 5.3% this year on average and 5.7% in 2015. China will again have the fastest growth among these countries, with rates just below 7.5% in 2014 and 2015.

The Outlook draws attention to a range of positive developments as well as significant downside risks. Investment and trade are both showing signs of picking up, but growth will remain moderate by past standards. Financial conditions are improving in the advanced economies, but tighter credit and supply side bottlenecks are damping growth in emerging economies.

Unemployment has begun falling from the historic levels seen in the wake of the crisis, but more than 44 million people are projected to still be out of work across the OECD area at end-2015, 11½ million more than before the crisis.

The OECD highlights a series of policy requirements for further strengthening the recovery. Monetary policy needs to remain accommodative, especially in the euro area, where a further interest rate reduction is merited, given low and falling inflation, and in Japan, where asset purchases should continue as planned. In the US, where the recovery is more firmly based, asset purchases by the Federal Reserve should be gradually phased out during 2014 and policy rates should start to be raised during 2015.

With financial fragilities persisting in Europe, the OECD said it is urgent to improve the health of the banking sector, complete the establishment of a fully-fledged banking union and sustain momentum for further reforms. The comprehensive assessment of euro area banks must provide reliable estimates of capital needs and be followed by swift recapitalisation, or if necessary, resolution.

The planned slower pace of fiscal consolidation in the US and some euro area countries is seen as warranted, given past efforts, but strong consolidation should proceed steadily in Japan, where the burden of public debt is very heavy and still growing.