The OECD forecasts all is well
November 15th, 2011
The OECD’s latest official forecasts have not been brought low by recent market convulsions. The OECD thinks China will grow by 30% in the three years 2011-13, and the emerging market economies of the G20 will grow by 22%. The growth is well distributed across the three years, with a modest dip in 2012.
The OECD thinks all other parts of the world will manage to grow a little. They think the US will be the best of the rest, growing 6.1% over the 3 year period. They place Euroland at 3.4% growth, with practically no growth in 2012, the middle year. Japan brings up the rear, at 3.1%, but does enjoy a stronger 2012 on the rebound from the falls in output brought about by the tsunami and earthquake in 2011.
They forecast that advanced country inflation will halve, from 2.7% in 2011 to 1.3% in 2013. The emerging market G20 countries they estimate will cut their inflation from 6.5% this year to 5% in 2013.
The OECD tends to follow trends as they emerge in markets, and as private sector forecasters revise their estimates. We think the growth outlook could be weaker than the OECD suggests in 2012. China, Brazil and India are having to take tough action to rein in credit expansion and price rises. The Euro area crisis is leading to weaker banks, and to less credit availability. The US herself will be feeling some impact next year from the need to take further action to curb the federal deficit, and from the continuing drain on consumers from weaker home prices and the debt overhang.
The OECD forecasts allows nothing for a further collapse, on the back of the Greek voluntary agreement with some creditors to pay back just half the debts owed. It must assume that Italy and Spain can continue to finance their deficits and refinance their debts without crisis. It allows for the long shadow of the past credit crunch, and the impact that has on banks. It does not look as if it assumes a second credit crunch brought on by larger problems of sovereign debts and weak banks.
On the OECD’s side is the fact that the main administrations seem to want to pump up more activity, rather than correct past excesses in the way they did in 2008-9. The US President is entering a re-election year. He is keen to innovate with easier money, and is trying to find ways of allowing fiscal expansion against the headwind of Republican rivals equally keen for him to take the hit to curb the deficit. The UK Coalition government wants to add monetary and bank credit expansion to its deficit reduction strategy. The government says it is looking to find ways to stimulate private sector activity and investment. In Euroland there are big plans to borrow very large sums under the EFSF proposals to maintain spending levels in various countries and to prop up banks at risk.
The emerging market world may be nearer a turn. Brazil and China have both taken action to cut excess credit and rising inflation. At some point they should be able to relax their stance a bit. India is further behind with its programme to cut price rises. All these economies will benefit from falls in commodity prices.
Growth is not the only determinant of Stock market progress, but it does help. We think the markets have been right to worry about slower growth next year, and to fear falling output in some of the weaker economies. If growth does carry on at a good pace, the markets are still very cheap.
