Tags: economic | recovery

Beware the Booby-Trap Recovery

By Hans Parisis
Thursday, 03 Sep 2009 03:05 PM Current | Bio | Archive

Today, the OECD gave its interim assessment on the economic outlook for the OECD countries. It forecasts economic growth across the Group of Seven countries to fall by 3.7 percent this year, which is less than the 4.1 percent drop projected in June 2009.

The latest GDP forecasts for this year provide an unchanged overall projection for the United States and slightly improved outlooks for Japan and the euro area, but they point to a gloomier situation in the UK.

It also states that governments will need to continue to stimulate their economies as rising unemployment and weak housing markets continue to dampen private demand. The current exceptionally low interest rates should remain in force for the time being.

The inventory adjustment that’s been underway since the beginning of the year appears to have progressed to a point where inventory changes may no longer be a drag on growth and could add to it in the near term. Also, global trade appears to have reached a trough and is poised to accelerate as the economic recovery gathers strength and broadens in scope.

Nevertheless, bank lending continues to decline and concerns about the health of the banking system remain. Notwithstanding, we have seen declines in the cost of money market funding, a narrowing of corporate bond spreads, a rebound in equity markets, and a moderation in the tightening of bank lending standards that have contributed to a marked improvement in overall financial conditions.

Mostly, thanks to policy stimulus and the large emerging-market economies which were not directly concerned by the meltdown in financial markets, the recovery in economic activity that began earlier this year is gaining momentum.

Notably in China, GDP is estimated to have risen by over 14 percent in the second quarter and activity continues to pick up, supported by the substantial fiscal stimulus and rapid increases in bank lending.

GDP growth in other Asian emerging-market economies also has strongly rebounded.

All that said, numerous headwinds for the recovery remain and the OECD expects the pace of the recovery to be modest for some time to come.

Ample spare capacity, low levels of profitability, high and rising unemployment, anemic growth in labor income, and ongoing housing market corrections will moderate any uptick in private demand.

At the same time, the need remains for households, businesses, financial institutions, and governments to repair the damage to their balance sheets.

The OECD also states that because of substantial slack combined with the prospect for a weak recovery, strong policy stimulus will continue to be needed in the near term.

Regarding monetary policy, it thinks that in most cases and on current prospects, that central banks will probably have to wait to start normalizing interest rates until well into 2010, and in some cases even beyond.

Looking further ahead, OECD countries need to prepare for the removal of the exceptional degree of support afforded by current monetary and fiscal policy stances. In this regard, preparing credible exit strategies and fiscal consolidation plans now, even if actual implementation will only commence later, is desirable.

We face a very unusual, vulnerable and slow recovery. In my opinion, the way to recovery is seriously booby trapped. I’d remain very cautious.

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Today, the OECD gave its interim assessment on the economic outlook for the OECD countries. It forecasts economic growth across the Group of Seven countries to fall by 3.7 percent this year, which is less than the 4.1 percent drop projected in June 2009. The latest GDP...
economic,recovery
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2009-05-03
 

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