Thursday, December 13, 2012

General Assessment of the Macroeconomic Situation

Source: Organisation for Economic Co-operation and Development:

After five years of crisis, the global economy is weakening again. In this we are not facing a new pattern. Over the recent past, signs of emergence from the crisis have more than once given way to a renewed slowdown or even a double-dip recession in some countries. The risk of a new major contraction cannot be ruled out. A recession is ongoing in the euro area. The US economy is growing but performance remains below what was expected earlier this year. A slowdown has surfaced in many emerging market economies, partly reflecting the impact of the recession in Europe.

The weaker outlook has several causes. A significant drop in confidence is a key driver. This takes place against a background of deleveraging, simultaneous fiscal consolidation across countries and a large multiplier, and weakening global trade. High and, in some countries, rising unemployment is further depressing confidence and spending.

Lack of confidence largely reflects insufficient or ineffective policy responses, both in terms of too little short-term action and a lack of credible long-term strategies. This, in turn, seems to be determined not so much by a lack of understanding of the policy requirements, but rather by failure to reach consensus on the policy response. The fiscal cliff and the debt ceiling in the United States, and the management of the euro area crisis are two cases in point. Policy challenges, both macroeconomic and structural, are present in emerging market economies as well, reflecting a range of country-specific conditions.

Failure to take sufficient action now could have significant consequences on the global outlook. If the fiscal cliff is not avoided, a large negative shock could bring the US and the global economy into recession. In the euro area, where the greatest threats to the world economy remain, progress in adjustment and in strengthening institutions has been significant over the recent past. However, challenging fiscal sustainability conditions in some countries risk sparking a chain of events that could considerably harm activity in the monetary union and push the global economy into recession.

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