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Workers at the Acrylon Plastics' manufacturing plant in Winnipeg (John Woods/John Woods for The Globe and Mail)
Workers at the Acrylon Plastics' manufacturing plant in Winnipeg (John Woods/John Woods for The Globe and Mail)

OECD boosts global growth forecast Add to ...

The global economy is recovering faster than expected from recession with Asia leading the way, but it is at risk from huge debts in developed countries and possible overheating in countries such as China, the OECD said on Wednesday.

In a twice-yearly report, the Paris-based Organization for Economic Co-operation and Development raised its forecast for global growth to 4.6 per cent in 2010 and 4.5 per cent in 2011. Last November it predicted growth of 3.4 per cent this year and 3.7 per cent in 2011, after a 0.9 per cent contraction in 2009.

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It was also far more optimistic about job markets globally, saying unemployment in its 31 member countries may have peaked at around 8.5 per cent - much lower than its previous prediction of almost 10 per cent.

The organization says the Canadian economy is rebounding "vigorously" from the recession trough, helped by a recovering trade sector and policy measures. It says the Bank of Canada "should start normalizing policy rate without delay and tighten gradually throughout the projection period."

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It sees growth in the Canadian economy of 3.6 per cent in 2010 and 3.2 per cent in 2011.

The new forecasts are higher than the average annual rate of growth in the decade before the financial crisis that spilled out of the United States in 2007 - an average of 3.7 per cent per annum over 1997-2006, according to OECD figures - but the OECD said the bounce was uneven and risk-prone.

The developed economies where the 2009 recession exacted the biggest toll were getting a lift from resurgent international trade, propelled primarily by export demand from rising economies in Asia, the OECD said.

It raised its forecast for U.S. growth this year and next to 3.2 per cent each time, from 2.5 and 2.8 per cent in its forecasts of last November.

It predicted Japanese growth of 3.0 per cent in 2010 and 2.0 in 2011, up from 1.8 and 2.0 per cent previously, and forecast the euro zone to lag with growth of 1.2 per cent and 1.8 per cent this year and next, still marginally more than forecasts of 0.9 and 1.7 per cent last November.

The biggest challenge the advanced economies faced right now was cutting post-recession debts and containing financial market instability that had spread recently from Europe.

Fiscal consolidation is imperative for many countries. It is also to lay the groundwork for sustained growth in the longer term," OECD Secretary General Angel Gurria said. "Getting the timing and sequencing right will prove enormously challenging everywhere."

That challenge is about juggling austerity measures that may be vital but are also likely to hurt growth, while keeping sight of the need to wean economies off rock-bottom interest rates and government support put in place when many believed the downturn could degenerate into a second Great Depression.

After a debt crisis that spread from Greece to spark broader financial market turmoil over perceived debt default risks, the euro zone is accelerating austerity plans such as cuts in public wages and spending.

Recent weakening of the euro currency should offset some of the growth hit from austerity by lifting exports and the region should avoid a relapse into recession, OECD chief economist Pier Carlo Padoan said in an interview with Reuters.

The OECD highlighted a very different threat to the emerging market economies such as China and India, saying: "A boom-bust scenario cannot be ruled out, requiring a much stronger tightening of monetary policy in some non-OECD countries, including China and India, to counter inflationary pressures and reduce the risk of asset-price bubbles."

In China, the OECD forecast economic growth of 11.1 per cent this year and 9.7 per cent in 2011, saying that there was a danger that measures to cool property markets and curb land prices would not see off the risk of overheating. Back in November, the OECD was forecasting Chinese growth of 10.2 per cent in 2010 and 9.3 per cent in 2011.

The report said it expected world trade to grow 10.6 per cent in 2010 and 8.4 per cent in 2011, after an 11 per cent plunge in 2009 that was largely concentrated in the months following the demise of Wall Street banking giant Lehman Brothers.

"Strong growth in emerging-market economies is contributing significantly," said the OECD, whose 31 member countries are mostly developed economies.

"The spillover from growth in non-OECD Asia could be stronger than expected, especially in the United States and Japan. From this point of view, the overall environment is relatively auspicious." the Paris-based organization said.

The forecasts are marginally higher than the International Monetary Fund's predictions of 4.2 per cent and 4.3 per cent expansions in global gross domestic product this year and next.

The OECD said another 16 million people had lost their jobs across its 31 members in the two years to the end of the first quarter of 2010. Bad as that was, it appeared to be less severe than initially expected and the OECD-wide jobless rate may have peaked as just over 8.5 per cent, it said.

The OECD said back in September it feared the jobless rate might run as high as 9.9 per cent before any turnaround.

Debt and debt market instability was the most immediate of the two risks highlighted by the OECD, and European governments were being forced to "respond by the minute" with policies to calm market fears that things could spin out of control.

"It's not just a European story," said Mr. Padoan.

Washington, London and Tokyo faced similar challenges after the recession, even if the euro zone had been forced to deal with the matter more urgently, Mr. Padoan said.

Central banks, which along with governments are waiting to see if they can remove the ultra-low interest rates and other support that helped engineer a recovery, can afford in most cases to hold off on policy interest rate rises for most if not all of this year in the major regions, the OECD said.

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