Monday, December 20, 2010

OECD forecasts: a weak 2011, awaiting a better 2012

In itsWorld Economic Outlook for November, the Organization for Economic Cooperation and Development (OECD) downgraded its forecasts for 2011. Growth in 2011 will be 4.2%thanks to the strength of emerging economies but recovery is uneven, with greater weakness in rich economies.

The OECD believesmore balanced growth is required, with smaller trade imbalances and a private sector taking over fromgovernment stimuli.With regard to trade imbalances, which are not expected to ease significantly over the next two years, the OECD states that coordinated policies are needed within the G-20 to avoid currency wars and prevent the emergence of protectionism.

As regards replacing public stimuli, the OECD particularly stresses the establishment of credible fiscal consolidation plans to restore economic players’ confidence in public accounts and tomake debt sustainable. All this would result in greater growth in the mediumterm. However, the OECD acknowledges that, in the short term, the effectsmight be restrictive but of limited intensity.

The international organization expects that 2011 will bemore difficult than 2010 with growth that, for OECD countries as a whole, will drop from2.8%to 2.3%, picking up again in 2012. Compared with July’s report, the forecasts have particularly been lowered for the United States, with expected growth of 2.7% for 2010 and 2.2%for 2011, in line with our own forecasts. The OECD is more optimistic about 2012, putting US growth

at 3.1%, which would lead to a fall in unemployment for the period. In contrast, the euro area has improved its prospects for 2010 with 1.7%growth, slightly better than we forecast. This growth, however, won’t improve in 2011, repeating the same figure of 1.7%, also coinciding with our forecasts, while, unlike the American case, there will be no appreciable improvement in 2012.

For Spain, the OECD predicts a slight decline in 2010 followed by 0.9%growth in 2011 and speeding up slightly in 2012 to a rate of 1.8%, slightly above theforecasts of ”la Caixa”.

The United States: growth burdened by employment
We predict the US economy will grow by around 2.2%for the whole of 2011, lower than the 2.8%expected for 2010. The continued weak labour and housing markets, which have amutual effect on each other, as well as household debt, which has reached 118.4%of gross disposable income, limit growth in private consumption while capital goods investment has lost some of its strength fromthe first half of the year and exports are still sluggish. In the coming year, neither fiscal stimuli nor the inventory cycle will contribute asmuch to growth as they did in 2010.

The data for the third quarter continue to point towards amodest recovery, with the economy growing by 0.6% quarter-on-quarter. In spite of the relatively good performance of private consumption, the growth in this period owes a considerable amount to the accumulation of stocks, while capital goods investment and exports continued to slow up compared with the second quarter. Consequently, the risk of anaemic growth, but not of a double-dip recession, exceeds the inflationary risk, with core inflation at record lows, and justifies keeping expansionary fiscal and monetary policies, although it’s still necessary to draw up a credible fiscal consolidation plan for the US economy in themediumterm.

Retail sales are a good example of this underlying resistance that private consumption appears to have found. The component that excludes volatile cars and petrol consumption grew by an appreciable 5.3%year-on-year in October, to which we should add the good performance by automobile sales. We must remember, however, that, discounting the effect of price variations, retail trade is still slightly below the level of December 2007, representative of the situation before the crisis.

This underlying resistance of consumers can also be seen, in a sense, in the business perspective. After five months of falling expectations, the business sentiment index of the Institute for SupplyManagement picked up strongly in October, with the manufacturing index rising to 56.9 points and the services index, which accounts for four fifths of private employment, reaching an even better level of 58.4 points. In both indices we have gone from a situation befitting anaemic growth to another consistent with growth in the economy as a whole of more than 3.0%.

But the main weak factor in the US economy is still the labour market which, in order to recover, needs this robust growth noted in the business sentiment indices to be a reality.Most forecasts for 2011 do not include this optimistic scenario, however, so that, without vigorous demand, the unemployment rate is unlikely to improve substantially and is still anchored at 9.6%in October.

The problem here is that a delay in recovery actually means the situation will get worse because, among other reasons, it pushes up the proportion of long-term unemployed, who are more difficult to relocate. The people
who have been unemployed for more than six months account for more than 44.0%of the total unemployed, doubling the maximum reached in 1982. To all this we must also add the large number of discouraged workers and others who, although they want to work full-time, can only find part-time jobs and who will absorb a considerable portion of any demand for work that might be created over the coming months. It’s therefore difficult to see any substantial improvement in employment before the end of 2011.

This persistent unemployment can be largely blamed on construction slumping again in the third quarter. The real estate problem is closely linked to the weakness in the labour market. In the boom years, construction had grown far above its relative weight in the overall economy, supported by household debt.With the end of easy credit, the sector has lost two million jobs which, given their nature, are difficult to reconvert. This job destruction has had a boomerang effect on the sector as a continually high unemployment rate results in mortgage foreclosures. These, in turn, swell the already excessive supply of housing, practically paralyzing residential investment. Another result of this excess supply is the stagnation in the precarious recovery in house prices and the volume of property sales hasn’t managed to improve consistently after the end of state aid.

Weak demand has left inflation at a record low. Although the general consumer price index (CPI) for October increased by 1.2%year-on-year, the low utilization of production capacity has meant that core inflation grew by just 0.6%year-on-year, the lowest rise since this concept started in 1958.Within a context of extensive leveraging, as in the present, continuously stagnated prices mean that households in debt lose the benefit provided previously by inflation, which reduced the amount of the debt in real terms. Hence the Fed is going to undertake a second round of quantitative easing to push inflation more towards the non-explicit target level of 2%, as well as distancing prices from any hypothetical drop.

For its part, the foreign sector doesn’t look like it’s going to be the catalyst required by the recovery in 2011. Firstly, given the size of the US economy, exports have less relative weight than in other countries. Secondly, it still hasn’t achieved robust growth, in spite of the relatively weak dollar. Although September’s trade balance brought some respite by reducing the trade deficit for goods and services by 5.3%compared with the previous month, this was mainly due to fewer imports, which are still getting back to normal after the sharp increases of the second quarter.

However, exports continue to slow up. Within this context, the dollar will probably remain relatively weak, influenced both by the continued trade deficit and also by the Fed’s expansionary policy.

Japan: weaker than it seems
The Japanese economy will probably have grown by 3.6%in 2010, boosted by exports picking up in the first half of the year and by public stimuli for consumption. But after the end of these temporary factors, growth for 2011 as a whole is unlikely to be higher than 1.5%, with an exit fromdeflation that will have to wait until early 2012. The upswing in GDP growth in the third quarter, up by 1.0%quarter-on-quarter, shows a better situation than is actually the case.

The greatest contribution to growth came this time from private consumption, boosted by temporary factors such as the end of fiscal stimuli for buying durables and due to the effects of a particularly hot summer, leading tomassive purchases of air conditioning and cooling equipment.

But the worst news was confirmation of the slowdown in exports, which have been consistently at the forefront of growth for the last decade. Capital goods investment also seemed more sluggish while, in assets, construction seems to have bottomed out, with a real estatemarket that, in August and September, showed a very timid recovery after the record lows of July.

Weak domestic demand could be seen again in October’s car sales, sliding back now that aid has ended. Looking at these weaknesses, industry, a traditional bastion of Japan’s economy, is still stagnant in the best of cases, with an industrial production index that, in September, accumulated its fourth consecutive drop and is now at 15.4% below the level ofMay 2008, at the start of the crisis.

There was a slight improvement in the labourmarket in the third quarter, with September’s unemployment rate falling to 5.0%. Prices slowed up their fall in October and the CPI was down 0.6% year-on-year but core inflation, the general index without energy or foods, once again lost a substantial 1.5%year-on-year.

In the foreign sector, the trade surplus increased in September but this was duemore to the drop in imports than any improvement in exports. In this respect, although sales to the rest of Asia had been themainmotor of growth in exports in the first half of the year, in September exports to China are still clearly below the maximum level of March.
Full report: OECD forecasts: a weak 2011, awaiting a better 2012

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