OECD INTERIM GLOBAL

ECONOMIC ASSESSMENT Tailwinds driving a modest acceleration...

but storm clouds on the horizon?

http://www.oecd.org/economy/economicoutlook.htm

Paris, 18th March 2015

11h00 Paris time

Catherine L. Mann OECD Chief Economist

Key messages

Positive surprises support somewhat better growth prospects

• Stronger incoming data

• Lower oil prices

• Easing by ECB and other central banks

Inconsistent real and financial signals point to risks

• Abnormally low inflation and interest rates

• Rapid moves in exchange rates and asset prices

• Still lagging real investment and employment

Policy implications: Balanced policy packages needed

• Implement stable medium-term fiscal path

• Reinvigorate structural policies appropriate to each economy

• Reduce over-reliance on monetary policy 2

Growth prospects have improved slightly compared to a few months ago

GDP growth1

Volume, per cent

1. Economies representing over 70% of global GDP measured at 2013 PPP exchange rates .

Source: November 2014 OECD Economic Outlook database; OECD National Accounts database; and OECD calculations.

3

0

1

2

3

4

5

0

1

2

3

4

5

November 2014 Outlook forecasts

March Interim Outlook forecasts

The oil price drop is positive for global growth

Brent crude price USD per barrel

4

Impact of fall in oil price between 2014 and 2015 on trade balance1

Billions of US dollars

1. Assumed average oil price (Brent) of $57 per barrel in 2015.

Source: Datastream; ICIC Pricing; OECD November 2014 Economic Outlook database; and OECD calculations

-600

-400

-200

0

200

400

600

-600

-400

-200

0

200

400

600

40

50

60

70

80

90

100

110

120

40

50

60

70

80

90

100

110

120

$85 per barrel = November 2014 Outlook assumption

Many central banks have eased monetary policy

5

Note: size of bubbles indicates relative GDP (at PPP). Russia, which raised policy rates sharply in

December before cutting twice since, is not included as an easer over this period.

Timeline of easing decisions since December 2014

Central banks of countries

accounting for about 48%

of global GDP have eased

over the past 3 months

EgyptIndia

Switzerland

Peru Turkey Canada

Euro area

AustraliaIsrael

China

SerbiaKorea

Pakistan Singapore

RomaniaDenmarkSwedenIndonesia

January 2015 →

← February 2015

March 2015 →

India

NorwaySwitzerland

← December 2014

Iceland

Poland

DenmarkDenmark

Denmark

China

Thailand

Romania

Turkey

Morocco

Uzbekistan

Botswana

The ECB’s action is working through financial markets

Yield curves Instantaneous forward rates

Source: ECB; Bank of England; Datastream .

Nominal effective exchange rate Index, Jan 2014 = 100

6

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

1 2 3 4 5 6 7 8 9 10Years

March 2014

November

2014

March 2015

84

86

88

90

92

94

96

98

100

102

84

86

88

90

92

94

96

98

100

102

Announcement of

expansion of the

asset purchase

De

pre

cia

tio

n

Interim Outlook – small upward revisions,

still only moderate growth

1. GDP at market prices adjusted for working days. In the case of Germany, this differs from the “headline”

measure, which does not include the working day adjustment. The unadjusted number for Germany would

be higher by 0.2 percentage points in 2015 and by 0.1 percentage point in 2016.

2. Economies representing over 70% of global GDP measured at 2013 PPP exchange rates. 7

Real GDP1

Percentage change 2014

Column2 Column3

March 2015

Interim

Projections

difference

from

November

Outlook

March 2015

Interim

Projections2

difference2

from

November

Outlook

United States 2.4 3.1 0.0 3.0 0.0

Euro area 0.9 1.4 0.3 2.0 0.3

Japan 0.0 1.0 0.2 1.4 0.4

Germany 1.6 1.7 0.6 2.2 0.4

France 0.4 1.1 0.3 1.7 0.2

Italy -0.4 0.6 0.4 1.3 0.3

United Kingdom 2.6 2.6 -0.1 2.5 0.0

Canada 2.5 2.2 -0.4 2.1 -0.3

China 7.4 7.0 -0.1 6.9 0.0

India 7.3 7.7 1.3 8.0 1.4

Brazil 0.0 -0.5 -2.0 1.2 -0.8

Aggregate2 3.7 4.0 0.1 4.3 0.2

2015 2016

A welcome fall in unemployment, but low employment rates suggest that slack remains

Employment and unemployment rates G7 countries, per cent

Source: OECD National Accounts database; OECD Main Economic Indicators database; and OECD calculations .

8

Real wage and labour productivity G7 countries, average growth rates, per cent

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

2000Q2-2009Q4 2010Q1-2014Q4

Real wage growth Labour productivity growth

55

56

57

58

59

60

4

5

6

7

8

9Unemployment rate (left scale)

Employment rate (right scale)

United States – continued cyclical recovery, despite weather

9

Cyclical recovery continues, though one-offs (e.g. severe winter weather) may mask underlying strength

Absent brinksmanship, fiscal policy is expected to remain neutral

Federal Reserve likely to delay first interest rate increase due to low inflation and dollar appreciation

Domestic demand growing faster than output – the United States is adding to demand in the rest of the world

Estimated effect of lower energy prices on share of energy in household spending

Nominal effective exchange rate Trade weighted, broad currency index 2010 = 100

0

1

2

3

4

5

6

0

1

2

3

4

5

6

2014 2015

Households save approx.

$90/month on energy

90

95

100

105

110

115

90

95

100

105

110

115

Source: Bureau of Economic Analysis; and OECD calculations.

Source: US Federal Reserve.

Retail trade 3-month moving average volume index, 2010=100

Euro area – tailwinds offer escape from stagnation

PMI New Orders/Incoming New Business

Source: ECB; Eurostat; Markit; Datastream . 10

Mortgage rates Per cent

Share prices Euro Stoxx 50 index, Jan 2011=100

96

97

98

99

100

101

96

97

98

99

100

101

40

45

50

55

60

40

45

50

55

60

Values above 50

indicate expansion

2.0

2.5

3.0

3.5

4.0

4.5

5.0

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Average Difference between max. and min.

60

70

80

90

100

110

120

130

140

60

70

80

90

100

110

120

130

140

Euro area – fiscal policy needs to complement

monetary and structural policies

Stable, medium-term fiscal path needed to support demand

Ad hoc extensions of deadlines (12 since 2009) create uncertainty, and reduce fiscal multipliers, thus undermining objective of the extension

Complexity of rules may lead to poor policy decisions, and ‘gamesmanship’’

11

Change in underlying primary balance % of potential GDP

-5

-4

-3

-2

-1

0

1

2

3

4

5

-5

-4

-3

-2

-1

0

1

2

3

4

5

Euro area

2007-2009 2009-2011

2011-2013 2013-2015

Source: OECD November 2014 Economic

Outlook database.

The Juncker Plan could spur demand and supply, as well as promote structural improvements

12

The Juncker Plan helps complete the Single Market, especially in network industries

Reducing regulatory differences by one fifth could increase cross-border FDI in the EU by up to 25% and trade intensity by up to 15%

Spillovers from collective action enhance the growth impact of investment

Electricity prices for industrial users Index EU average = 100; 2012 or latest available

20

40

60

80

100

120

140

160

20

40

60

80

100

120

140

160Germany United KingdomFrance SpainGreece Portugal

Public investment Volume index, 2009 = 100

40

60

80

100

120

140

160

180

40

60

80

100

120

140

Sources: IEA; OECD National Accounts database.

Japan – getting growth and inflation back on track, and staying there

13

Low oil prices and the latest monetary and fiscal stimulus provide a welcome impetus for near-term growth

Implementation of structural policies (the “third arrow”) is critical to raise productivity and growth

The scale of the challenge of reducing the public debt burden remains exceptionally large

Labour productivity growth Per cent

Public debts and deficits Per cent of GDP

-6

-4

-2

0

2

4

6

8

-6

-4

-2

0

2

4

6

8

Source: OECD National Accounts database.

0

60

120

180

240

0

5

10

15

20Overall budget deficit (left scale)Government gross liabilities (right scale)

China – growth slowing gradually to the official target of around 7%

14

Lower oil prices and policy stimulus are counterbalancing factors weighing on growth, notably weakness in the real estate and financial sectors

Slowing domestic demand creates tension between meeting growth targets and rebalancing the economy

Service sector liberalisation would unleash a new growth drive

Gap between floor space started and sold

Millions of square meters

Real total domestic expenditure Year-on-year percentage change, 3-quarter moving average

60

65

70

75

80

85

90

95

100

105

Real property price Index 2010=100

0

10

20

30

40

50

60

70

80

Source: CEIC; OECD November 2014 Economic Outlook

database.

4

5

6

7

8

9

10

11

4

5

6

7

8

9

10

11

India – now leading the growth pack, but facing numerous challenges

The improvement partly reflects data revisions. The underlying acceleration is slower, with sluggish investment and exports and emerging obstacles to structural reforms.

15

-20

-15

-10

-5

0

5

10

15

20

25

30

-20

-15

-10

-5

0

5

10

15

20

25

30GDP (new series) GDP (old series)

Gross fixed capital formation Exports of goods and services

GDP, exports and investment Volume, 4-quarter moving average, year-on-year percentage change

Source: Indian Central Statistics Office; and OECD calculations.

Offsetting the positive – commodity economies

The fall in commodity prices goes well beyond oil, and is hurting commodity-exporting economies like Brazil

16

Brazil: contribution to GDP Volume , year-on-year percentage change

60

70

80

90

100

110

120

60

70

80

90

100

110

120

Agricultural raw materials

Metals and Minerals

Food and Tropical Beverages

Source: Brazilian Institute of Geography and Statistics (IBGE); Datastream.

Non-oil commodity prices Index, 2011=100

-6

-4

-2

0

2

4

6

8

10

12

14

-6

-4

-2

0

2

4

6

8

10

12

14

Imports ExportsConsumption InvestmentGDP

Structural reform momentum has slowed and should be reinvigorated

17

During the last two years, most advanced countries did less in areas identified as priorities by the OECD than in the previous period

Responsiveness rate1, Going for Growth recommendations

1. Share of recommendations in Going for Growth 2011 for which 'significant' action has been taken, with an

adjustment to reflect the fact that some areas of reform are more difficult than others.

Source: OECD Going for Growth (2015).

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.82013-14 2011-12

Storm Clouds:

Disconnect between modest real economy and strong financial signals

18

Deflation risks: The oil price fall added disinflationary impetus

when inflation was already low

19

Number of countries with negative 12-month headline inflation rate

Headline inflation in OECD countries Per cent

Where inflation was already too low, the challenge of getting back to target has increased

Deflation increases the vulnerability of indebted households, firms and governments and aggravates stagnation risks

-5

0

5

10

15

20

25

30

-5

0

5

10

15

20

25

30 25th percentile Median 75th percentile

0

5

10

15

20

25

0

5

10

15

20

25

Source: OECD Main Economic Indicators database.

Negative term premium: Nominal interest rates are extraordinarily low,

and in many cases now negative

20

Medium-term bonds of several governments

are now trading at negative nominal yields Bond yields are far below historical

norms in most countries

10-year government bond yields Per cent

0

2

4

6

8

10

12

0

2

4

6

8

10

12Q4-2014 1980-2007 average

-1.5

-1.0

-0.5

0.0

0.5

1.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

DenmarkJapanSwitzerlandSwedenGermanyFranceAustriaBelgiumNetherlands

3-year government bond yields Per cent

Source: Datastream.

Suppressed risk premium: Prolonged ultra-low interest rates are building up

vulnerabilities

21

US bond and foreign exchange volatility Index, January 2014=100

Credit default swap prices United States high-yield corporate, basis points

40

60

80

100

120

140

160

40

60

80

100

120

140

160

2010 2011 2012 2013 2014 2015

Average, 2005-

present

MSCI World equity index January 1990=100

0

50

100

150

200

250

300

350

0

50

100

150

200

250

300

350

Source: Datastream.

70

85

100

115

130

145

160

175

190

205

0

50

100

150

200

250

300

350

400

450

Foreign exchange market volatility (left scale)

Treasury note volatility (rightscale)

Summing up: Improved prospects, but no room for complacency

22

Global economy may be at a turning point

• Falling energy prices underpin acceleration in growth

• Downward push on inflation gives room to central banks to support demand

Mutually reinforcing fiscal, monetary, structural policies are needed

• Maintain monetary stimulus as appropriate

• Implement consistent medium-term fiscal policy

• Re-invigorate and target structural reforms

Over-reliance on monetary policy is a concern

• Evidence of mis-pricing of risks and exchange rate overshooting

• Monetary policy alone has not revived real investment