A fragile recovery


Remarks by Angel Gurría, OECD Secretary-General, delivered at the Forum of the Americas

Montreal, Quebec, Canada, 6th June 2011

(As prepared for delivery)

Commissioner, Under-Secretary, Presidents, Ladies and gentlemen,

It is a pleasure but also a challenge to conclude this inaugural session after such distinguished speakers. As you know, we have launched our new Economic Outlook 10 days ago. Let me distil its main messages and discuss the longer-term policy challenges facing most OECD countries.

As already mentioned by previous speakers, the global recovery is becoming self-sustained and more broad-based. We project global output to grow by around 4¼ per cent in 2011 and 4½ per cent in 2012. As for Canada, after more than 3% growth last year, we expect its output to continue at a healthy clip in the coming couple of years.

However, this global recovery is taking place at different speeds across countries and regions. Most advanced economies are faced with sluggish growth, high budget deficits and high unemployment: nearly 50 million people remain jobless in the OECD area as a whole. In most emerging-market economies, by contrast, vibrant domestic demand growth and high commodity prices are generating inflationary pressures and prompting policy tightening.

This means that, although the recovery is under way, the outlook is not without risks. On the upside, the short-term stimulus from additional structural measures may be stronger than projected. Private-sector activity may also benefit further from increasing confidence. On the downside, further increases in the price of oil and other commodities could hit disposable income. The Chinese slowdown may also be more severe than projected. Other downside risks are related to the unsettled fiscal situation in the United States and Japan, weakness in housing markets, and continued financial and debt problems in some euro-area countries.

If these downside risks interact, their cumulative impact could weaken the recovery significantly. All this suggests that the global crisis may not be over yet.

This outlook calls for differentiated policy responses. In the advanced economies, structural reforms are needed to boost growth against a backdrop of fiscal consolidation and gradual monetary normalisation. In the emerging markets, the monetary stance needs to be tightened to curb inflation. Structural reforms there could also make growth more sustainable and inclusive, while contributing to global rebalancing and enhancing long-term capital flows.

Let me now focus on four longer-term policy challenges faced by OECD countries.

First, dealing with unemployment. Steadfast policy action is needed to tackle high unemployment and prevent joblessness from becoming entrenched. This is among the most pressing legacies of the crisis. The recession offers some lessons on how to redesign and improve labour market policies. This includes, for example, more effective services and training to match workers and jobs, and well designed work-sharing agreements that can minimize employment loss in downturns.

In Canada, government initiatives such as work-sharing, extended employment insurance benefits and training programmes helped cushion the impact of the recession on Canadians, while keeping them attached to the labour market. With employment conditions improving, the government has appropriately begun to phase out these exceptional measures to reduce the risks of dependency. In the meantime, training programmes should be better targeted at the most vulnerable groups such as the long-term unemployed and low-skilled workers.

Second, sustaining growth. Experience shows that, following financial crises, there are risks of stagnation as structural adjustment and financial repair are delayed. Stagnation could possibly also emerge from persistent deterioration of the structural and business environment. The potential for growth-enhancing structural reforms and policies to unleash new sources of growth is therefore substantial. And structural and innovation-friendly policies should contribute to making the economy greener, as discussed in the OECD Green Growth Strategy, released last week in Paris at our annual Ministerial Council Meeting.

Canada has a commendable track record in implementing pro-growth structural reforms. But it could lock in greater productivity gains through lowering restrictions on foreign direct investment, reducing barriers to competition in network industries, and further encouraging innovation, including through continued investment in education and research.

Third, making progress in fiscal consolidation. High government indebtedness is another heavy legacy of the crisis, with government debt set to rise to just above 100% of GDP in the OECD area as a whole. This is about 30 percentage points above the pre-crisis level. Consolidation requirements to merely stabilise debt are therefore substantial for many countries. And evidence shows that, beyond some threshold, high public indebtedness takes a toll on economic growth.

Structural reforms can also contribute to fiscal consolidation. To illustrate, in the OECD area, a durable increase in employment rates by one percentage point through structural reforms could improve government budget balances by 0.3 to 0.8 percentage points of GDP. There is also massive potential for increasing the efficiency of public services through fiscal consolidation programmes. This would allow frontline services to be maintained at a lower cost. There could also be greater recourse to green revenue in fiscal consolidation programmes, including receipts from green taxes and carbon trading.

Last, dealing with global imbalances. They are widening again as the global recovery gathers steam. But the composition of such imbalances is changing. China’s current account surplus is well below pre-crisis peaks due to adverse terms-of-trade movements and less buoyant export performance. At the same time, the current account surpluses of the high-saving oil-producing economies are mounting due to high oil prices.

Structural policies have also an important impact on the size and composition of capital movements. One of the main current policy challenges in many countries is to reconcile open capital markets with the goal of coping with short-term instability through temporary measures. It is thus important that advanced and emerging-market economies agree on a framework that would allow such goals to be reconciled, including under the auspices of the G20.

Ladies and gentlemen,
We need to put together political will, talent, leadership and great communication skills to simultaneously tackle the challenges of unemployment, growth, fiscal consolidation and global imbalances. It is precisely the role of the OECD to help countries achieve such complex goals; to design better policies for better lives. Count on us.

Thank you for your attention.


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