Remarks by Angel Gurría, OECD Secretary-General, delivered at the China Development Forum
19 March 2011, Beijing, People’s Republic of China
Dear Vice-President, Ladies and gentlemen,
It is my great pleasure to be here today and to discuss the international economic outlook. We are at a delicate moment, which calls for different policies to be implemented across different regions. Everybody’s wisdom, political will and stamina is necessary to ensure the recent recovery becomes more resilient.
The good news is that the world economy continues to recover. Output will grow by around 4¼ and 4 ½ per cent respectively in 2011 and 2012. But we should not be mislead by these aggregate worldwide numbers. They hide a considerable dispersion in performance across countries and regions.
For sure, many economies continue to expand robustly. Dynamic economies, led by China and India, are expected to expand at over 7 percent in both 2011 and 2012.
In contrast, looking at the OECD economies, the recovery there remains considerably more modest. The pre-crisis peak in the level of GDP has yet to be reached for the OECD as a whole. And this should not happen before the end of this year. As for inflation, it has so far been tame. However, this is not surprising, as there remains so much slack in the economy and in the labour market!
Moreover, the recovery is not only modest, it also remains fragile. Look at the disappointing fourth-quarter growth outcomes for a number of European economies! In contrast, the outturn for the same quarter in the United States was considerably better than expected.
OECD countries will thus expand by only 2.3 percent in 2011 and 2.8 percent in 2012. But here again, we need to differentiate clearly across regions. The United States will enjoy a 3 percent growth in 2012; while the growth in Europe and Japan is expected to be of 2 and 1.3 per cent respectively, with considerable disparity within the euro area. Eastern European countries will lead the way, while the periphery and southern European countries continue to struggle.
So yes, the world economy continues to recover, albeit at very different pace. In addition, as always, there are significant risks around these projections.
For OECD countries, the positive or upside risks include the possibility of stronger rebound in private investment. This would steam from the strong profit position in the corporate sector and the sharp compression of capital spending during the recession. In addition, aggregate demand might be boosted more strongly than expected by the supportive monetary and financial conditions. This could be particularly true if banking and sovereign debt problems ease, as seems to be the case currently in the euro area. This would indeed have beneficial effects on monetary transmission.
On the opposite hand, the negative risks include rising food and commodity prices, as I mentioned already for China. The recent surge in oil prices, due to the political tensions in North Africa and the Middle East, is adding to the inflationary pressures, especially in emerging-market economies. If not reversed, it would be of particular concern. Authorities might be forced to respond. And that would be to the detriment of an already fragile recovery. However, it is probably less of a risk in the advanced economies where economic slack is still considerable.
A further downside risk is related to weakness in housing markets in the United States and the United Kingdom. We have indeed recently witnessed house prices resuming their fall.
So, the current recovery is uneven, fragile in some areas, and with considerable negative risk due to the latest political developments. We are not out of the woods yet. This situation is challenging. Such an uneven growth is indeed causing a fork to develop in the policy requirements for OECD and non-OECD economies.
For most emerging-market economies the policy challenges largely relate to rebalancing growth towards domestic sources. Other challenges relate to the consequences of relatively faster growth, and include inflation, currency appreciation and excessive capital inflows. To face these inflows, either countries let their currency evaluate, which could lead to a loss in competitiveness and problems in the current account; or they don’t and run the risk of inflation and asset bubbles, as currently the case in China.
Indeed, the downside of the robust growth is that inflation has become a problem, not least in China. Here, price increases have indeed become widespread. And they are not just confined to food products. Policy action will be needed to moderate this inflation.
Monetary policy must thus be tightened. It has started to be so and more will likely come. Some further and significant increases in regulated interest rates are indeed necessary. The monetary policy also needs to become more forward looking, anticipating increases in inflation, relying more on market based interest rates, and using the exchange rate as a means of moderating inflation.
But, beyond this monetary policy, structural reforms are the only fundamental and long-term answer to boost domestic growth and thus to deal with external imbalances. Structural reforms are the only viable option. In the case of China, only further labour market policy and social policy reforms, notably in the area of pensions, health care and education, would allow reducing precautionary savings and thus boosting domestic consumption.
On the other side of the fork, the overarching policy challenge for most mature economies will be to continue to support a timid recovery, while at the same time addressing failings that came to light during the recession and dealing with the legacy of the recession itself, including high fiscal deficits and unemployment.
For the recovery to become fully self-sustaining, household, financial sector and government balance sheets all need to be put back on a sustainable footing. To some extent this has already occurred in the household and financial sectors. But this is not the case for governments. And getting government deficits and public debt levels back down to sustainable levels will be a drawn out process.
Here again, the dreadful combination of the fiscal and the job crisis can only be addressed through structural reforms. “Going structural” is the only option. The solution lies in enhancing the productive capacity of our economies. Structural reforms will allow fostering new sources of growth, through green growth, innovation, new skills or gender economic empowerment.
But these are only the country-specific policy challenges. On the top of them are the global policy priorities. These include pursuing strong growth and sustaining it over the longer term, as well as dealing with global imbalances and capital flows.
The OECD stands ready to help where it can in tackling these challenges. And it is very well placed to do so as its competence lies precisely where the two sides of the fork meet: structural reforms.
The OECD can help by offering advice and expertise to individual national governments in undertaking these badly needed structural reforms. We do that through our extensive range of reviews in economic, social, environmental, public governance, agricultural policies, etc.
And we also help by actively participating in the international debate, bringing to bear our expertise and doing the analysis and surveillance where required. That is what we are doing in the G20 setting, where we provide leaders with inputs for discussion on a wide range of topics, including labour policies, investment, anti-corruption, exchange of information for tax purposes, fossil fuel subsidies, development, etc. We also support the structural agenda in one of the most innovative initiative of the G20, the Framework for Strong, Sustainable and Balanced Growth.
Ladies and gentlemen,
In this very delicate moment of uneven recovery, timid and fragile in places, with unexpected upheavals, let us stand together and cooperate to design better policies for better lives. Our economic situations differ, but our fate is common. The need for policy coherence and consistency is stronger than ever. Cooperation is becoming increasingly complex, but there is no other road to prosperity. We need everybody’s wisdom to face the great challenges of today and tomorrow. We need to discuss openly to find good, and most probably new, policy approaches. You, academics, are crucial in this respect. We rely on your ideas.
Thank you for this opportunity to speak to you today.