Remarks by Angel Gurría, Secretary-General of the OECD, 6 May 2014, Paris, France
Ministers, Ambassadors, Ladies and Gentlemen,
Welcome to the launch of the OECD Economic Outlook. It is a pleasure to see here Ministers and senior representatives from more than 40 countries, including from our accession countries, key partners and friends from South East Asia.
I would like to share with you our core messages before handing over to Rintaro Tamaki, the Deputy Secretary-General and Acting Chief Economist of the OECD, who will elaborate on our projections, the risks to the outlook and the key challenges faced by policy makers.
The recovery is strengthening, but major challenges remain
I am coming here with some relatively good news. After six long years of pain and fear, the major advanced economies are finally building momentum. While two of the four cylinders of the global economy’s growth engine – credit growth and emerging market activity – are still running below full speed, there are encouraging signs that the other two, trade and investment, are finally warming up.
Indeed, after growing at a par with output for about two years, trade is now beginning to grow faster than output, which is its normal condition. And business investment is also picking up in many countries. Greater risk appetite, healthy corporate balance sheets and strong profit growth outside the euro area, coupled with a decline in policy uncertainty in the US, all point to an increase in investment in the coming months.
At the same time, risks of further major economic disruption have receded. And while downside risks still dominate, ranging from geopolitical risks in Ukraine and Russia to deflationary pressures in the euro area and to economic and financial tensions in some EMEs, they now coexist with upside risks which are stronger than before.
But major challenges remain. Policy makers have to deal with the heaviest legacies of the crisis – slow growth, high unemployment, growing inequalities and a loss of trust. The good news is they can now switch focus from avoiding disaster to addressing these challenges.
Policy requirements to support the recovery
OECD’s outlook calls for policy action in a number of areas.
Many countries have made progress in consolidating public finances. The effort will have to be maintained, albeit at a more moderate pace, to bring down debt to more manageable levels. The only exception is Japan, where urgent and decisive action is needed to stabilise first and eventually start to bring down the very high debt level.
Regarding monetary policy, the US is gradually reducing and will eventually withdraw the extraordinary stimulus which avoided recession from getting deeper. This is welcome. It suggests a return to normality. Other regions, by contrast, still need this exceptional stimulus for the foreseeable future. Our view is that the Euro Area would benefit from enhanced monetary policy support now.
With limited room for manoeuvre either in the monetary or in the fiscal fronts, the only way to go is to advance on the structural policy front. The crisis has resulted in a permanent loss in the level of potential GDP in most countries. On average, potential output in the OECD is around 3½ per cent below its pre-crisis level. In some countries the loss goes into double digit territory. This means that the GDP of these countries will not catch-up to its pre-crisis trajectory, even with a continuing recovery.
Although most countries that have been under programmes or under severe market stress have made impressive reform efforts, there remains much more to do to spur growth in most advanced and emerging economies.
Let’s take the example of Japan. Thanks to Prime Minister Abe’s ‘three arrows’ strategy, and especially of the first arrow of monetary easing, we see the first real signs in 15 years of the country exiting deflation. But the journey does not stop there. To secure this success and revitalise the Japanese economy much depends on the third arrow, the structural arrow, which has yet to be deployed. The time for reforms is now. This is true for Japan but also for other advanced economies and EMEs.
Strengthening inclusiveness and resilience
And spurring growth won’t be enough. Policy makers also need to ensure that growth becomes more inclusive so that living standards improve for all segments of the population, including the young, the women, the old, the poor and the migrants.
The first priority here is to deal with the social legacy of the crisis. As unemployment starts receding, we must not forget the long-term unemployed. They will have major difficulties re-entering the labour market even now that the recovery is strengthening. Effective activation policies are essential to help these people find jobs.
More generally, pro-growth policies have to be combined with policies to foster new sources of employment, to improve job quality, to invest in education, skills and life-long learning for all, and to ensure fairness in the tax system.
Additional effort is also needed to ensure that our economies are more resilient, less prone to crises and more resilient to shocks. In particular, there is a need to finish the overhaul of the banks’ business models, including their capitalisation rules, their asset quality reviews, their stress tests and the banking union in the case of European banks.
Finally, we need to rebuild trust in government and public institutions. Trust has been seriously damaged by the crisis. After years of low or negative growth and fiscal stringency, policymakers are facing their challenges with depleted political capital. The only way to restore confidence is to seize the window of opportunity that has now opened to set global growth on a stronger and more sustainable footing.
I will now give the floor to our Deputy Secretary-General and Acting Chief Economist, Rintaro Tamaki, who will guide you in more detail through this Outlook and the related policy challenges.