Remarks by Angel Gurría, OECD Secretary-General
OECD Headquarter, 18 November 2010
Good morning ladies and gentlemen,
Next month marks the start of the 50th Anniversary of the Organisation. An anniversary is an opportunity to look back, to question, and to look to the future – but above all it is a chance to reaffirm what the OECD is for – to design better policies for better lives.
The OECD was born out of the Marshall Plan, It came into being at the height of the Cold War in 1961. The world has changed a great deal since – and the OECD has been both a witness and catalyst of that change. The Polluter Pays Principle; the Anti-Bribery Convention; the Guidelines for Multinational Enterprises; our codes on investment, our global tax treaties, the monitoring of development assistance and the PISA Programme of International Student Assessment are just a few of the ways the OECD has made its mark developing the highest standards in public policy.
This time it is the Economic Outlook that brings us together. But we work in many other areas with the overriding aim of building a stronger, cleaner, fairer world economy. We are placing greater emphasis on identifying new greener sources of growth and on putting the wellbeing of citizens at the centre of our concerns.
The OECD has helped governments during the darkest days of the recent crisis and we continue to have a major role in devising solutions to the massive governance and business failures which lay behind the collapse of confidence.
Only recently, at the Seoul G20 Summit, I urged the G20 leaders to « go structural ». Most of the room for expansionary stimulus has been used up. We now need a clear and ambitious agenda for structural reforms to support strong and balanced growth. Well-designed and well implemented reforms yield a triple dividend:
• they lift output and employment,
• they strengthen public budgets and
• they rebalance global demand
What we witness today in our analysis is that the recovery, though still in progress, has become more hesitant since the early part of the year. Output and trade growth have both softened as support from fiscal stimulus and other temporary factors have faded. The slowdown was expected, but, at least in the OECD area, has proven more pronounced than previously thought.
The OECD projects the soft patch in output growth to be short-lived, with economic activity in OECD countries gradually picking up steam over the coming two years. Accordingly, we project economic growth in the area to slow down from 2¾ per cent this year (the same as in the previous Economic Outlook released in May of this year) to 2¼ per cent next year (as compared to 2¾ per cent in the previous Outlook), before picking up to 2¾ per cent in 2012.
Labour market conditions have begun to improve this year in most OECD countries. Even so, the OECD-wide unemployment rate, which peaked at 8½ per cent at the end of 2009, is set to remain high, at 7¼ per cent by the end of 2012. With such considerable labour market slack persisting and the output gap still sizeable by the end of 2012, inflation is projected to remain muted almost everywhere in the OECD area.
Risks and uncertainties persist:
• Downside risks include the possibility of renewed declines in house prices in the United States and the United Kingdom cutting into households’ wealth and affecting consumption growth. Further downside risks stem from ongoing concerns about public debt sustainability in some OECD countries, which could disrupt financial markets and confidence. Moreover, growth prospects could weaken if the large capital inflows into many emerging economies and the associated tensions in foreign exchange markets prompt protectionist responses.
• Upside risks include the possibility that strong corporate profits and earnings will boost business investment more than projected; that household balance sheet adjustments already undertaken will allow consumption to rise more quickly than we now think; and that the financial sector, which has recovered profitability and liquidity, will renew its lending more rapidly than expected.
The overarching challenge facing policymakers is to provide a credible medium-term framework, to stabilise expectations and strengthen confidence, particularly for the private sector. Enhanced confidence is necessary to make growth self-sustained rather than policy driven and could result in a faster-than-projected recovery.
Specifically, the financial and economic crisis has left the public finances badly deteriorated and government indebtedness is set to reach all time highs. A major improvement of underlying fiscal positions is needed to bring debt back to sustainable levels and stem concerns in financial markets. Another challenge is that uneven growth within the OECD area, as well as between the OECD and emerging economies, will add to global imbalances, which are among the most significant threats to the recovery.
Against this backdrop, we recommend governments in almost all OECD countries to pursue budget consolidation actively from 2011 onwards. Meanwhile, most monetary authorities will need to exit from exceptional stimulus in a way consistent with macroeconomic developments, without exacerbating fragilities in financial markets. At the same time, the momentum toward financial reform needs to be maintained to strengthen the stability of the global financial system.
In many OECD countries high unemployment risks becoming long-lasting due to skill erosion and growing skill mismatches. Again, structural reforms, such as strengthening work incentives built into social benefit systems, are needed to address this problem.
In OECD and non-OECD countries alike, exchange rate changes consistent with international rebalancing should not be resisted, not least to avoid countervailing interventions and protectionist responses. International collaboration, notably within the G20 process, will be essential to warding against protectionism.
However, exchange rate adjustment alone cannot do the full job of global rebalancing. Structural reforms that are desirable in their own right should help address the underlying causes of global imbalances though their impact on saving and international capital flows. For example, if emerging countries were to expand their social safety nets and develop their financial markets, they could reduce their saving and dependence on financial services abroad. In addition, achieving global consistency of financial regulation so as not to distort the global allocation of capital becomes more pressing.
We face challenges as tough as at any time in the Organisation’s history. The OECD is needed now more than ever. Looking back over the efforts taken to fight the crisis, I am confident that international cooperation is strengthening and I feel equally confident that the organisation can rise to the challenges ahead.