Remarks by Angel Gurría, OECD Secretary-General, delivered at "Circulo de Confianza, Foro Nueva Economia"
(As prepared for delivery)
Ladies and gentlemen,
I am grateful for this invitation, and I am very pleased to be with you here once again.
I would like to share with you some thoughts about the outlook for the global economy and to present our views on the situation in Spain, in light of the current difficulties afflicting the world economy as a whole and the euro zone in particular.
The outlook for the global economy has deteriorated
These are critical times for the world economy. The recovery lost steam in the second quarter of 2011, and our projections for the third and fourth quarters point to an even more drastic slowdown in activity. We will begin 2012 at a much more sluggish pace than we had coming into 2011. According to our data, revised in September, the G7 economies will grow at an annual rate of less than 1% in the second half of this year, with the sole exception of Japan.
Only a few months ago it seemed as though the world recovery was on track. Although the pace of growth varied notably among regions, with the emerging countries in the lead, what seemed clear was that the world economy was finally taking off after the great recession of 2008 and 2009. Yet now, not only are we facing a slowdown in growth, but hardly a day goes by without headlines telling us of turbulence in the markets, new downgrades by the rating agencies, and falling indices of business confidence.
What brought us to this situation? Essentially, two factors.
First, the problems flowing from the sovereign debt crisis and the worsening of public finances, both in the United States and in the euro zone. Public debt, which exceeds 100% of GDP on average for OECD countries, is unsustainable. It has become a very heavy mortgage on any economic recovery.
Second, there are the doubts surrounding the soundness and solvency of the financial system. The banks' exposure to sovereign debt and the real estate market has moved the banking spread in unison with the sovereign spread. Some European banks have seen their ratings cut, and this has made the situation worse. The inter-linkage of markets means that this is not just a European problem but a global one.
These two factors explain to a large extent the current slowdown in growth, the fall in consumption and investment, both public and private, and the growing aversion to risk. But there are two other aspects that are also making the situation worse. On the one hand, the impact of the Japanese disaster on global distribution chains was much greater than initially expected. And on the other hand, the continued rise in commodity prices – prices for foodstuffs and raw materials – over the last 18 months has had a stronger impact on productive activity than we were anticipating.
And as if all that were not enough, we are looking at very high levels of unemployment – this is the great social drama that the crisis has bequeathed us. According to our recent Employment Outlook, which we published only two weeks ago, there are still 13 million more people out of work in OECD countries than there were before the collapse of Lehman Brothers three years ago.
The worldwide unemployment figure is now 200 million. Long-term unemployment is especially alarming, particularly among vulnerable groups such as youth, immigrants and women. G20 countries are going to have to create new jobs at a rate of 1.3% per year until 2015 just to return to the employment levels of 2008. Yet right now, they are doing so only at 0.8%.
Lasting solutions will not come from short-sighted policies
The current situation can be explained by concrete causes, but also by factors that were already present three years ago and that have not been tackled with sufficient determination. The crisis of this summer and the last few weeks highlights the need to act decisively with short-term as well as medium and long-term measures to restore confidence among households, businesses and markets.
For the short term, it is clear that we have less room for manoeuvre in terms of fiscal, monetary and exchange rate policy than we did in the autumn of 2008, and it varies considerably from one country to the next. But we must not overlook the combined power that these instruments can wield if applied correctly. We still have some ammunition left, and we must use it more intelligently and efficiently.
Monetary policy has to accommodate itself to the unfavourable circumstances in the advanced economies. For example, if the risk of a slowdown persists, central bankers are going to have to consider interest rate cuts wherever possible, as well as unconventional measures that will inject liquidity into the system, such as buying assets or resorting to quantitative easing.
The room for manoeuvre on the fiscal front will depend to a large extent on the situation in each country. Countries with relatively healthy public accounts can afford to pursue countercyclical policies or they can at least cushion the impact with automatic stabilisers. In countries where the situation is tougher, such as the United States and the euro zone, the only way out will be through solid, credible and sustainable fiscal consolidation plans over the medium and long term. Only in this way can they restore the confidence needed not only to calm markets but also to create the necessary budgetary room to deal with economic weaknesses in the short term. President Obama's recent jobs package is a good example.
Lastly, adjustments to exchange rates can help some economies by freeing monetary policy from the full burden of fighting inflationary pressures.
I want to emphasise one fundamental idea here: the only way out of the current mess is through long-term policies and structural reforms that attack the problems at their root; policies that will offer not just momentary fixes but lasting solutions. These structural reforms are also essential both for restoring short-term confidence and for reactivating the economy.
Well then, what are these measures?
The first, of course, is to respond with leadership and determination to the debt crisis, which is the most immediate problem. But that response must go beyond the approval – and implementation – of fiscal consolidation plans. It must also provide for the establishment of long-term fiscal frameworks and it must include measures on both the expenditure and the revenue side.
Second, the financial system needs in-depth reforms. We must at all costs avoid the spread of contagion from sovereign debt to the banking system, with the same determination that we showed in 2008 and 2009. In this respect, the OECD has for some time been proposing measures such as the separation of banks' commercial and investment activities, at least by delimiting interlinkages and mutual liability between the two lines of business. We are also in favour of stronger capital and liquidity requirements, as well as measures to stimulate competition in the sector.
Third, there are the structural reforms that can raise the growth potential of the economy from one generation to the next. Measures such as labour market reforms to create more jobs, or greater competition and more appropriate regulation of product markets in order to boost productivity. And of course, policies that emphasise education, innovation and green growth, which will be the real drivers of the economy of tomorrow.
Fourth, no long-term solution can afford to overlook those whom the crisis has rendered most vulnerable. We need policies that will foster inclusive development of the kind where all citizens feel themselves beneficiaries of the advantages associated with globalisation. Our countries are experiencing a true social tragedy, one that we must address with decisive and innovative measures.
Lastly, we need co-ordination structures that can respond to global challenges with the speed and the capacity they demand. World leaders need to seize the initiative and not be left on the defensive by the vagaries of the economy. The mechanism is already in place: the Framework for Strong, Sustainable and Balanced Growth developed by the G20. Now is the time to transform it into a true policy tool that will foster growth and allow us to combat structural problems such as global trade and financial imbalances. It is also essential for Europe to harmonise its fiscal policy and endow itself with a political, monetary and regulatory architecture so that it can respond to markets with a single, unwavering voice that conveys confidence.
How do we see the Spanish economy in this context?
The crisis has had a more pronounced and persistent impact on the Spanish economy than on most OECD economies, as a result of the collapse of the real estate sector, a high initial unemployment rate, and a rapid deterioration in the government deficit. And yet the current slowdown I have described will be less acute than in other economies. This is because of a lower current degree of exposure, a relative softening in recent months of the adverse economic impact of the real estate sector, and the very fact that growth rates are already lower than in other advanced countries.
The fact that the real estate crisis has had a lesser impact on the economy does not mean that the excess supply has been absorbed or that the market has adjusted. In fact, the stock of housing has barely been reduced, and this will keep prices on a downward track. The explanation lies, rather, in the significant shrinkage of the construction sector itself, and its weight in the overall economy. This indicates gradual progress in modernising and diversifying the productive fabric.
In recent months we have also seen a positive contribution to growth from the external sector, something that is helping to remedy Spain's traditional trade deficit. The current account deficit, for example, has dropped from 10% to 4% over the last three years. In fact, the value of exports has already exceeded pre-crisis levels, reflecting a much faster recovery than in other European economies. The external sector is being pulled along by the growth of emerging markets, especially those in Latin America.
The process of building down debt among households and businesses is also helping to cushion the impact of the slowdown in Spain. The twin reductions in the public deficit and in private debt mean that the Spanish economy is relying more on export-oriented activities to generate growth and employment. The greater price competitiveness fostered by the debt crisis also points in this direction.
But we cannot be complacent. The global slowdown is affecting the performance of the Spanish economy and its outlook. Activity is slowing and could even stagnate during the remainder of the year. Yet we should not expect contractions such as we will see in other OECD economies. For the time being we are sticking to a forecast of annual growth of 0.9% in 2011, as we announced in May. Unfortunately, that rate is not enough to bring unemployment below 20% in the short term.
And of course, the risks are ever greater, beginning with the well-known spread on sovereign debt, which if it remains too wide will impose an excessively high price on financing needs.
I don't have time to go into detail, but in the document we have distributed you will find our recommendations as to policies that could help underpin the Spanish recovery in this admittedly unfavourable context.
On the economic and financial front, we recommend continuing with the important steps taken toward fiscal consolidation, with special attention to the autonomous regional accounts and the possibility of boosting tax revenues. We also propose further measures to strengthen the banking system, and in particular to dispel any doubts about the solvency of institutions by injecting liquidity if necessary and continuing with restructuring of the savings funds and improvements to their corporate governance.
You will find that, in the document, we welcome the significant reforms undertaken with respect to the labour market and the pensions system, but we emphasise the need to go further in reducing labour market duality in order to encourage hiring and promote competitiveness. Policies need to place the emphasis on long-term unemployment and on supporting the most vulnerable groups, by improving coordination among the various entities.
And naturally, we cannot overlook the three pillars that must sustain the change in the Spanish productive model, to make the economy competitive and adapt it to the needs of the future – education, innovation, and green growth.
Ladies and gentlemen,
We are living in difficult times that demand firm policies with a vision of the future, policies that can look beyond today's headlines or the latest opinion survey and that will place our economies on the path to sustainable recovery, something we can only achieve by tackling problems at their roots.
Spain has taken important steps in the last year to clean up its public accounts and to move forward with the transformation of its productive model. And it will continue to make progress. As I always say, this is a country that has some unique advantages: leading multinational companies, a well-prepared generation of young people, the second most widely spoken language in the world, and above all the vital energy and the courage that have always enabled it to flourish in the face of adversity.
Thank you very much.