US-economy-accelerating-but-not-yet-in-top-gear

US economy accelerating

but not yet in top gear

25th November 2014

Catherine L. Mann OECD Chief Economist

OECD Economic Outlook US and Global Briefing

GLOBAL OUTLOOK

2

The global economy is stuck in low gear

3

World GDP growth

Per cent, seasonally adjusted annualised rate

Source: November 2014 Economic Outlook database.

-8

-6

-4

-2

0

2

4

6

8

-8

-6

-4

-2

0

2

4

6

8

Average (1995-2007)

Trade growth has been weak

4

Trade intensity1

Index, 1990=100

1. Index of sum of exports and imports as a ratio of GDP. Source: November 2014 Economic Outlook database.

50

100

150

200

250

300

350

United States Trend (1990-2007)

50

100

150

200

250

300

350

Japan

50100150200250300350

European Union

50100150200250300350

BRIICS

5

Demand patterns are diverging

.

Non-residential investment per capita

Index, 2005 = 100

Private consumption per capita

Index, 2005 = 100

80

90

100

110

120

80

90

100

110

120 United States Euro area Japan

85

90

95

100

105

110

115

85

90

95

100

105

110

115United States Euro area Japan

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

6

Trends are also diverging among emerging economies

.

GDP per capita Volume, 2005=100

Source: OECD National Accounts database; November 2014 Economic Outlook database; IMF WEO database; Central Statistical Organisation, India; and OECD calculations.

80

100

120

140

160

180

200

220

240

80

100

120

140

160

180

200

220

240

China

India

Brazil

Russia

Growth projections for 2015-16

GDP Volume, percentage change

7

Source: November 2014 Economic Outlook database.

Column1 2013 2014 2015 2016World 3.1 3.3 3.7 3.9

United States 2.2 2.2 3.1 3.0Euro area -0.4 0.8 1.1 1.7

Japan 1.5 0.4 0.8 1.0China 7.7 7.3 7.1 6.9India 4.7 5.4 6.4 6.6Brazil 2.5 0.3 1.5 2.0Russia 1.3 0.3 0.0 1.6

Global risks are on the downside

There is a growing risk of euro area stagnation

Diverging monetary policies could lead to more volatility for emerging economy

Advanced economy debt levels are high and credit growth in some emerging economies has been rapid

Potential growth rates could fall further

8

Monetary, fiscal and structural policies need to support growth

Monetary, fiscal and structural policies are complementary tools

Monetary policy needs to remain accommodative in most countries, and more aggressive QE is needed in the euro area

Progress on fiscal consolidation has left room in many economies -- including in the euro area -- to ease the drag of fiscal policy on demand

Ambitious structural reforms are needed to boost investment, trade and job creation

9

US OUTLOOK

10

11

Output is expected to accelerate relative to its trend over the past few quarters

GDP

Volume, 2009=100 Real GDP growth

Per cent, annual rate

Presenter

Presentation Notes

Past recoveries = prior expansions using available quarterly estimates since 1947. The rates of increase in output over the remainder of the projection represents a fairly significant acceleration relative to trend: Measured on a year-over-year basis, output growth accelerates from 2.2 percent in 2013 and 2014 to 3.1 percent in 2015 and 3.0 percent in 2016. Although GDP growth was relatively strong in the second and third quarters of 2014, a fair bit of this strength can be attributed to the unwinding of transitory influences (such as inclement weather) in the second quarter that held back the level of activity early in the year. (Because of time-averaging, the first-quarter decline receives more weight in the year-over-year percent change for 2014. However, measured on a four-quarter moving average basis, real GDP appears to have increased 2.1 percent from 2013Q3 to 2014Q3 following a 2.3 percent increase over the preceding four-quarter period.)

12

Consumption accelerates modestly but all pistons are not firing

Presenter

Presentation Notes

Past recoveries = prior expansions using available quarterly estimates since 1947

13

Household wealth has rebounded and deleveraging has largely run its course

14

Business investment looks mediocre

Presenter

Presentation Notes

The real capital stocks on the left-hand side are from the BEA’s annual estimates through 2013. Forecasts from 2014 onward are calculated using a standard accumulation identity, assuming that the annual rate depreciation remains at its rate from 2011 to 2013 rate (when it has hovered around 8½ percent). The projected growth rates in the real nonresidential capital stock are 2.0 percent in 2014, 2.4 percent in 2015, and 2.7 percent in 2016.

15

Residential investment accelerates but remains well below cruising speed

Presenter

Presentation Notes

The real stock of residential capital is calculated as explained for slide 14. The annual depreciation rate from 2014 to 2016 is assumed to be 2.3 percent, in line with recent norms.

16

Trade growth remains slow mirroring the global pattern

Presenter

Presentation Notes

Note that these figures are shown in levels, so that even though the lines appear parallel, imports grow at a slower rate than exports: On a year-over-year basis, imports increase 4.4 percent in 2015, and 5.3 percent in 2016, whereas exports increase 5.7 percent in 2015 and 5.6 percent in 2016. These forecasts broadly reflect elasticities embedded in the trade models used by the MAD section: Exports grow broadly in line with exports markets (= imports of trading partners). Except in instances when we have compelling reasons to think there have been gains/losses in external competitiveness, we usually impose a long-term elasticity of export volumes to export markets of 1. Imports grow around 1½ times the percentage rate of change in total domestic demand, somewhat below the elasticity from our trade equations estimated over the period form 1990q1 to 2012q2. In our view, the USD appreciation would justify an increase in the elasticity of imports to domestic demand from below 1 in 2012/13 to around 1.5 for the projections. (The elasticity of imports to domestic demand is not particularly low in 2014.)

17

The drag from fiscal consolidation is waning

Government spending Contribution to GDP growth 4 quarter moving average

Government fixed assets Annual growth rate

real net fixed assets (excluding defense)

Presenter

Presentation Notes

Growth of government fixed assets is partly slowing along with the slowing of potential

18

The budget deficit has narrowed but debt remains high

19

Declines in unemployment running ahead of the recovery

Presenter

Presentation Notes

The graph on right hand side cannot easily be extended through the forecast period because we do not produce a forecast a concept of employment that is directly comparable to the nonfarm payroll measure. (If we wanted to show a forecast, we could show quarterly data for the OECD concept of “dependent employment”, which, for the US, is nonfarm payroll employment plus the measure of wage-earning farm workers from the household survey.)

20

Signs that labour market slack remains elevated

21

Labour market tightening should put upward pressure on wages and demand

Presenter

Presentation Notes

On right-hand side chart, “Unemployment rate gap” is the difference between the unemployment rate and the NAIRU, while the output gap is the percentage difference between real GDP and potential GDP. The projected acceleration in the level of real wages is based upon the projected narrowing of output and labour-market slack shown on the right-hand side, and reflects the usual delays in the transmission of tightening slack to real wages. Even with the projected acceleration of real hourly compensation, the rate of increase only approaches structural productivity growth at the end of the projection period.

22

Inflation rises but not achieve target

Presenter

Presentation Notes

Will tidy up figure and add second panel

Risks

Acceleration of aggregate demand may not materialise

Normalisation of monetary policy could create financial market tensions

Upside and downside risks from the process of monetary policy normalisation

Household consumption and business investment may pick up more quickly than expected

23

Monetary and fiscal policy

Fiscal policy should focus on addressing longer-term pressures associated with healthcare spending and old age pensions

Assuming the recovery remains on track, policy rates should be gradually raised as labour-market slack is eliminated and wage growth becomes more apparent

Monetary policy rates should remain at their current low level through mid-2015

The authorities should facilitate infrastructure spending

24

25

More information…

data visualization tool

OECD Economic Outlook, November 2014

• Website with additional information

• Read this publication online

• Compare your country with OECD data

www.oecd.org/eco/economicoutlook.htm

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