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Economic Memo: Euro Zone Leaders Hail Even Weak Economic News

June 6, 2013 by Leave a Comment

“Clearly encouraging,” the nation’s prime minister, Mariano Rajoy, said of the development.

Never mind that nearly five million people in Spain are out of work. The latest unemployment report from the government, issued on Tuesday, was held up by Mr. Rajoy as a sign that maybe, just maybe, the economy is getting better.

Nearly six years after the financial crisis in the United States spread across the Atlantic, plunging Europe into recession and, in some places, desperate depression, “good” is relative. Economic figures that would be considered disastrous elsewhere are being held up by many politicians and policy makers as really not so bad at all — the first tender shoots of a recovery that is out there somewhere.

Or perhaps not. Politicians everywhere rarely tire of talking up the economy. The question is whether the supposed good news that European leaders are trumpeting is merely convenient cover. The risk — not only to Europe, but to the rest of the world — is that they are simply hoping they have done enough to restore growth, and that the hard decisions some say must still be made can be pushed into the future.

On Thursday, the European Central Bank left interest rates unchanged, defying calls for bolder action. Even so, Mario Draghi, the president of the bank, highlighted the potential “downside risks surrounding the economic outlook for the euro area.”

What few politicians acknowledge publicly is that many of the steps that economists say must still be taken are surefire vote-losers. Liberalizing rigid labor markets, for instance, might spur growth and help young people break into the work force. But it would surely alienate voters who end up losing jobs they thought they had for life.

“Policy makers have a strong interest in the current strategy’s appearing to work,” said Simon Tilford, chief economist at the Center for European Reform in London. “Even the faintest glimmer of hope is interpreted as a sign of recovery.”

Mr. Tilford said Europe was trapped in a Japanese-style malaise. “There’s a surreal debate going on that if we don’t do A, B or C there’s a risk Europe will be like Japan,” he said. “If you look at the data for the last six years, Europe is already worse.”

The danger is that a sense of economic decline has become so ingrained that mediocrity is mistaken for excellence and the status quo marketed as a forward march. Germany, the economic envy of Europe, is expected to grow a mere 0.3 percent this year — a blistering pace only by the new standards of underachievement.

Financially, Europe looks less risky than it did a year ago, when fear was rampant that the euro might fall apart. Bond markets have calmed down. Unemployment is declining, albeit very slowly, in a few countries like Spain and Ireland.

During a visit to Athens last week, the Dutch finance minister said he detected “the first signal of a turn in the economy.” Then, on Wednesday, news arrived from Brussels that the Greek economy was indeed getting better. It shrank by only — only — 5.3 percent in the first three months of the year. That was in fact an improvement: it had contracted 5.7 percent the previous quarter.

The financial markets, which have bounced back from their lows, don’t fully capture the economic pain many Europeans feel. That is because financial markets ride on hope and look forward, not back. Germany’s benchmark DAX index of stocks, for instance, has risen 39 percent in the last year, even though that nation’s economy, while strong for Europe, is hardly humming along. On Thursday, European stocks were off just modestly, despite the weak outlook from the E.C.B.

As worries continue about the long-term future of Europe and its currency, the euro, some analysts worry that the good news, such as it is, might be too good. Signs of growth could prompt a sell-off in European bond markets, driving up interest rates at a time when economies are still fragile.

Article source: http://www.nytimes.com/2013/06/07/business/economy/euro-zone-leaders-hail-even-weak-economic-news.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

Political Economy: Italy’s Crisis Has Few Good Solutions

March 10, 2013 by Leave a Comment

The markets are too sanguine about Italy. The country’s politics and economics are messed up, and there are no easy solutions. And although Rome does have the European Central Bank as a backstop, it may have to get to the brink before using it.

Investors had jitters after the election last month, pushing 10-year bond yields to 4.9 percent from 4.6 percent. But by last Friday, they had fallen back to 4.7 percent. Investors have convinced themselves that some political solution will be cobbled together; that if one is not, it does not really matter; and that if worst comes to worst, the European Central Bank will pick up the pieces by buying the country’s bonds.

Mario Draghi, the E.C.B. president, gave some support to the latter two ideas last week. He played down the risks to Italy’s fiscal position by arguing that much of the country’s belt-tightening was on “automatic pilot.” He also made it clear that the E.C.B.’s bond-buying plan was still available for countries that followed the rules.

But messy politics and economics could make each other still messier. Months of political paralysis will squish investment and could dampen consumption. That will exacerbate the recession. Fitch Ratings — which downgraded Rome’s debt to BBB-plus from A-minus last Friday — thinks gross domestic product will shrink 1.8 percent this year. A deeper recession, meanwhile, means a worse fiscal position. The ratings agency expects government debt to reach the equivalent of nearly 130 percent of G.D.P. this year.

Political stalemate also means Italy will not come to grips with its long-term problems. The country has barely grown in the past 20 years. Even Mario Monti’s technocratic government did little to address problems like inefficient bureaucracy, cartels, a dysfunctional legal system and inflexible labor markets.

Without a long-term growth plan, Italy’s debt level may not be sustainable, despite a budget surplus before interest payments equal to about 3 percent of G.D.P. But further belt-tightening would be hard to implement, given the electorate’s reluctance to back austerity. So Mr. Draghi’s automatic pilot may not secure a safe landing.

What solution then is there to paralysis? Participants at the Ambrosetti Forum in Cernobbio last week had three main scenarios: a grand coalition, a minority government and new elections. None looks like a recipe for stable government.

The essential problem is that the Italian electorate split three ways — with Pierluigi Bersani’s center-left party, the Democrats; Silvio Berlusconi’s center-right party, the P.D.L.; and Beppe Grillo’s upstart group, the 5-Star Movement, each gaining nearly 30 percent of the vote. Meanwhile, Mr. Grillo refuses to work with either of the other groups and Mr. Bersani will not form a coalition with Mr. Berlusconi.

The electoral system makes things worse. It has given the largest grouping, the Democrats, a majority in the lower house of Parliament, but nobody is in control of the upper house. A majority is needed in both houses to govern.

Optimists say it may be possible to form a grand coalition if Mr. Bersani and Mr. Berlusconi make way for new leaders. Matteo Renzi, Florence’s young mayor, who lost to Mr. Bersani in the Democratic primary, would be an obvious choice. In an opinion survey last week by the polling institute SWG, Mr. Renzi was the favorite to be prime minister, with a level of support of 28 percent compared with 14 percent for Mr. Bersani, 13 percent for Mr. Grillo and 10 percent for Mr. Berlusconi.

The snag is that Mr. Renzi does not have support either in Parliament or in the Democratic Party machine. What is more, a grand coalition could easily collapse in bickering. Time would have been wasted, and Mr. Grillo would be well placed to lead the biggest group in a subsequent election.

Some observers think that would not be too bad. After all, the former comic wants to give the political system a much-needed shake-up. The snag is that Grillonomics is pretty scary. Mr. Grillo is advocating a 20-hour workweek and restructuring of Italy’s debt. He is also playing with the idea that Italy should quit the euro.

If a stable government cannot be formed, aren’t new elections the solution? The problem is they would probably produce another stalemate. The best hope for breaking that would be if Mr. Renzi were the Democrats’ candidate.

But even that might not work. Although he appeals to the center ground, some of the Democrats’ left-wing supporters might peel off to more extreme parties.

Another hope is that a minority government, led by Mr. Bersani, could somehow hang on until the tectonic plates shifted enough inside Parliament for a grand coalition to be formed. But Mr. Bersani will struggle to get such a minority government up and running. Even if he does, it is likely to collapse, having achieved nothing except wasting time.

Optimists hope the voting system can be changed before a second election. But even that seems unlikely. Although Mr. Bersani, Mr. Berlusconi and Mr. Grillo all want a new system, they have different ideas on what it should look like.

The most likely scenario, then, is that Italy will be forced into a second election that will still produce no clear winner. If the 5-Star Movement is the largest party, markets could panic. If one of the other two comes out ahead, there will have to be renewed discussions of a grand coalition. Even then, a further rise in bond yields may be needed to knock heads together. Meanwhile, the recession will drag on and the fiscal position will worsen. Not a pretty picture.

Hugo Dixon is editor at large of Reuters News.

Article source: http://www.nytimes.com/2013/03/11/business/global/11iht-dixon11.html?partner=rss&emc=rss

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Economix Blog: Nancy Folbre: Capitalism and the Kids

December 10, 2012 by Leave a Comment

Nancy Folbre, economist at the University of Massachusetts, Amherst.

Nancy Folbre is an economics professor at the University of Massachusetts, Amherst. She recently edited and contributed to “For Love and Money: Care Provision in the United States.”

Now that the birthrate in the United States has fallen below replacement level (by at least one measure), more journalists are reporting on the costs of children. The New York Times columnist Ross Douthat laments the “cultural decadence” of such economic considerations even as he acknowledges their relevance.

Today’s Economist

Perspectives from expert contributors.

Cultural change – what Mr. Douthat refers to as modernity and others refer to as post-familialism – is surely a part of the story. But the growth of capitalism itself – the expansion of wage employment at the expense of family-based enterprise – accounts for most of the pressures driving a process of fertility decline that has been under way for more than 200 years.

Public policies intended to buffer the impact of capitalist labor markets on family life are a central feature of our social history.

Capitalism is not the villain of some simple morality tale. It did not intrude into an idyllic world of reciprocity and commitment. The traditional family-based economy was based on distinctly patriarchal principles. Male heads of household wielded legal and economic power over their wives and children. More children meant more labor for the family enterprise.

The growth of wage employment gradually disrupted that patriarchal regime, giving women and youth more opportunities outside the home and more bargaining power within it. The growing demand for skilled labor helped induce a shift toward smaller families, with better-educated, more costly offspring. This shift began long before modern contraceptive technologies could be had.

Women mobilized a collective effort to demand the same rights that men enjoyed and gradually began to prevail against those who claimed that feminism would destroy family life. Both women’s empowerment and fertility decline accelerated the process of capitalist development that had set them into motion.

But the very structure of a new system based on competitive labor markets imposed penalties on parents, who lost the ability to capture many of the potential economic benefits of their child-rearing efforts. Prolonged school attendance raised the age at which young people began to work and the search for jobs often took them away from home.

As more single men and women flooded into the labor market, willing to work for lower wages than those with children to support, working-class advocates began to insist on the need for a “family wage” sufficient to care for dependents. Early campaigns for minimum-wage legislation warned that, without it, working-class families would not be able to successfully raise the next generation.

The movement to provide old-age pensions (first on the state, then on the federal level) emphasized the benefits of taxing the younger generation as a whole to support the elderly rather than expecting parents to recoup expenses from their own children.

The expansion of public health and education services represented a form of social investment in which taxpayer investments in children would be repaid by the future revenues that a more productive labor force would generate.

Policies offering many parents tax deductions and credits, the protections of a social safety net and the right to unpaid leaves from employment all represent explicit efforts to revalorize family commitments.

In short, many programs of the so-called welfare state, often derogated by conservatives as undermining family life, have rather proved a substantial – if not always successful – source of support for child-rearing.

Unfortunately, we have socialized the benefits of child-rearing more thoroughly than we have socialized the costs, taxing the working-age population to provide benefits to the elderly through Social Security and Medicare but providing uneven and somewhat unpredictable public support to parents. Single mothers in particular remain far more susceptible to poverty in the United States than in similarly affluent countries.

As a result, public policies have had the effect of slowing but not halting fertility decline in the United States. The resulting aging of our population is contributing to both fiscal and political stress.

A more serious problem is our failure to adequately improve adequately improve our children’s capabilities, cramping their hopes for upward mobility. In a report echoing the family-wage advocates of the early 1900s, Lisa Dodson and Randy Albelda document the negative impact of parents’ low-wage employment on child outcomes.

Today, in an era of serious economic stress, in which the best promises of capitalism have been broken, low-income mothers and children are threatened with major cuts to public assistance. Yet conservatives staunchly defend the unprecedented riches of the top 1 percent, resisting even small increases in marginal tax rates.

Yes, Mr. Douthat, cultural decadence is definitely in evidence.

Article source: http://economix.blogs.nytimes.com/2012/12/10/capitalism-and-the-kids/?partner=rss&emc=rss

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Economix Blog: Unwanted Homes, Unwanted Workers

December 12, 2011 by Leave a Comment

CATHERINE RAMPELL

CATHERINE RAMPELL

Dollars to doughnuts.

Once upon a time, housing looked like a rare, highly valued asset; now, the market has been flooded with unwanted homes. And as I wrote in an article Sunday, economic forces have helped reallocate those excess houses to more productive (and non-residential) uses, like a park, work of art or marijuana garden.

In the course of reporting for this article, I realized that today’s housing problems are not terribly dissimilar from the last time one of pillars of the economy faced sudden devaluation: its labor force, right after World War II.

During the war, able-bodied workers were in short supply relative to the output required to keep the country functioning and pumping out tanks and munitions. To lure more women into the labor market, employers raised wages and the government popularized “Rosie the Riveter.”

Then the war ended. Millions of soldiers flooded back into an economy that had been restructured to operate almost entirely without them. Politicians feared that the markets would again be overwhelmed with excess labor and the Great Depression would resume.

But just as governments are bulldozing away excess housing today, after World War II the government removed some of the surplus labor from the market then as well. It did so through two channels — one for women, and one for men.

DESCRIPTIONTo avoid having a glut of labor, Rosie the Riveter was sent back into the kitchen.

“First there was propaganda to get women out of the home, and then came the propaganda to get women back in the home,” said Lawrence Katz, an economics professor at Harvard who has written about postwar labor markets. Many employers also laid off their female employees to make room for the returning troops, he said.

If the women were re-domesticated, the men were instead educated.

Returning soldiers were offered a free college or technical education by the G.I. Bill – an offer that also happened to delay their entry into the labor force.

“It was a payment for their service, but it was also to keep them from going out and looking for jobs,” said Professor Katz.

There was indeed a brief recession in 1945 as war production unwound, but unemployment managed to stay astoundingly low in the postwar years. Reducing the supply of labor wasn’t the only reason workers escaped devaluation on the scale seen in the recent housing bust; there was also a major postwar increase in demand for workers.

Pent-up demand for products that were rationed during the war and construction for newly forming families also created a lot of new jobs for returning soldiers. (It helped that the United States was the only major developed country whose capital stock hadn’t been bombed out, of course.)

The government bolstered demand for workers too, by creating lots of labor-intensive post-war infrastructure projects.

So what lessons do those policies offer for today’s housing market?

Now, as then, the government has two main ways to stabilize the market (assuming politicians want price declines to stop, and they may not). Government policy can either reduce supply or increase demand — or do both at once, as it did after World War II.

Reducing supply in the housing market means bulldozing more homes or otherwise assigning them to other uses (or at least rezoning houses so that the private sector can assign the buildings to other uses). State and local governments across the country have already begun this strategy.

Increasing demand for homes, on the other hand, is a bit trickier.

One possibility is to increase the population of the United States. Accordingly, Senators Chuck Schumer and Mike Lee have introduced a bill offering residential visas to any immigrants who buy housing in the United States.

There are many opponents to this idea, thanks to fears that bringing in more foreign homeowners means also expanding the oversupply of workers that we have today. (Many economists disagree with this assessment, but that’s a whole other can of worms.)

The United States may not even need more people to move here to absorb excess homes. Maybe all it needs is for its existing population to change its family arrangements.

Household formation has slowed dramatically since the recession began. Over a million homes that should have been formed in the last few years – at least, given demographics — weren’t, according to Mark Zandi of Moody’s Analytics. That’s approximately equal to the country’s current surplus of vacant homes.

Household formation is slowing not because the population is shrinking, but because cash-strapped families are doubling up and unemployed recent college graduates remain tethered to their parents’ couches.

An implication is that to fix the housing market, the government should be promoting job growth, which will enable crammed families to peel off from one another. Now, as in the postwar decade, employment and housing remain inextricably linked.

Article source: http://feeds.nytimes.com/click.phdo?i=1fe56691c9baecf524492543bb98ef2d

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Economix: Using Google Searches to Track Housing Prices

June 14, 2011 by Leave a Comment

DESCRIPTION

The Bank of England has started to use Google search data to help it spot trends in Britain’s housing and labor markets.

There is a strong correlation between how often people search online for “estate agents” and actual house prices, two Bank of England researchers wrote in a report on Monday.

The central bank is now monitoring online search terms like “mortgage” and “house prices,” or “jobs” and “unemployed,” to get a more up-to-date picture of the state of the economy. The Bank of England previously depended only on data like property sales or unemployment figures, which are usually published with a delay.

DESCRIPTIONNick McLaren and Rachana Shanbhogue, Bank of England

“Monitoring current economic activity closely is an important aspect of policymaking, but official economic statistics are generally published with a lag,” Nick McLaren and Rachana Shanbhogue wrote in the bank’s quarterly bulletin. “Internet search data can help predict changes in unemployment in the United Kingdom. These appear to be as useful as existing indicators. For house prices, the results are somewhat stronger.”

The report also pointed toward possible problems with the data. “The data have a short backrun compared to other economic indicators,” the two researchers wrote.

The data are also unlikely to cover every household in Britain, they said. Not everyone searches for homes or jobs on the Internet, and people use different search terms to do so.

Article source: http://feeds.nytimes.com/click.phdo?i=ae3344469e8f10672a4bf00a5ded7f7f

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Frustration Grows as Nominee for the Fed Withdraws

June 7, 2011 by Leave a Comment

The candidate, Peter A. Diamond, an economics professor at the Massachusetts Institute of Technology and a Nobel Prize laureate for his work on labor markets, cited Republican opposition in asking the White House to withdraw his nomination.

But Democratic leadership did not press for a vote on the nomination, and Congressional aides said that the White House invested relatively little energy in fighting for Mr. Diamond. Moreover, they said that the administration had not submitted nominations for vacancies atop several of the federal agencies charged with overhauling and improving financial regulation in the wake of the 2008 crisis.

“There’s a deep feeling of frustration,” said one Democratic aide, who spoke on the condition of anonymity because of the sensitivity of the subject. “No one wants to insult the administration or put them in a position that’s uncomfortable for them or worse for them. So you’re just sitting around waiting for them to take the lead.”

The White House press secretary, Jay Carney, said on Monday that the White House did everything it could to push the nomination, and he lamented the “partisan obstructionism” that had prevented approval of Mr. Diamond.

“I don’t have a tick-tock on the different actions that different members of the administration took in support of this nomination,” Mr. Carney said in response to a question from a reporter. “We strongly supported it. We thought he was highly qualified. We regret that it’s come to this and he’s withdrawn his nomination.”

The withdrawal leaves two empty seats on the Fed’s seven-member board, which, along with selected presidents of the Fed’s regional banks, sets monetary policy. The position of vice chairman for supervision, created last year as a top bank regulatory post, also is vacant.

President Obama has not nominated a head for the Office of Comptroller of the Currency, which oversees national banks, or a new chairman for the Federal Deposit Insurance Corporation, which insures bank deposits and cleans up failed banks. There is no nominee to lead the new Consumer Financial Protection Bureau, or the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac.

The White House has said for months that it will submit nominations “as soon as possible.” On Monday it promised action “in short order.” It is widely expected to nominate the F.D.I.C.’s vice chairman, Martin J. Gruenberg, to replace Sheila C. Bair, who ends her term as chairwoman in July. Mr. Gruenberg, seen as relatively noncontroversial, could be packaged with other nominees in the hope of a halo effect.

Democrats say that they hold Republicans responsible for preventing votes. In addition to derailing Mr. Diamond, Republicans forced the withdrawal earlier this year of a nominee to head the Federal Housing Finance Agency, and have said they will not allow a vote on any nominee to lead the consumer agency until the bureau is restructured.

There are also strategic considerations. A senior White House official said that the Obama administration had to weigh the costs of trying to pressure Senator Harry Reid, the majority leader, to push for cloture votes in the face of Republican opposition.

“We could go for a symbolic cloture vote. It would burn 30 hours on the clock. That’s 30 hours that the Senate is in session. So it’s a big ask of Harry Reid to say ‘put aside your legislative agenda and go for a cloture vote,’ ” the official said.

Mr. Diamond focused his criticism on Republicans in a sharply worded opinion article published Monday in The New York Times. “We should all worry about how distorted the confirmation process has become, and how little understanding of monetary policy there is among some of those responsible for its Congressional oversight,” he wrote.

Mr. Diamond said that Republicans were mistaken to treat his expertise in labor economics as irrelevant to decisions about monetary policy. “Understanding the labor market — and the process by which workers and jobs come together and separate — is critical to devising an effective monetary policy,” he wrote.

Senator Richard C. Shelby of Alabama, the senior Republican on the Banking Committee, reiterated on Monday his belief that Mr. Diamond had lacked the necessary qualifications.

“It is my hope that President Obama will now nominate someone capable of garnering bipartisan support in the Senate,” Mr. Shelby said in a statement Monday. “It would be my hope that the president will not seek to pack the Fed with those who will use the institution to finance his profligate spending and agenda.”

Mr. Shelby added that he had great respect for Mr. Diamond and wished him the best.

The Fed board of governors has long been populated with a mix of people including lawyers, bankers and economists with a wide range of specialties. Mr. Shelby himself has voted for a labor economist on at least one previous occasion: he supported the 1994 nomination of Janet Yellen, now the Fed’s vice chairwoman.

But the nomination became a proxy for a broader fight between the White House and Congressional Republicans over the government’s role in the economy. Mr. Diamond publicly supported a continuing Fed program to stimulate growth by purchasing $600 billion in Treasury securities. Mr. Shelby and other Republicans described the program as a backdoor method of lending the government more money.

Helene Cooper contributed reporting.

Article source: http://feeds.nytimes.com/click.phdo?i=4d454fc154f23cefbbd9978ed1648fd3

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Fed Report Notes That Economy Continues to Improve

April 14, 2011 by Leave a Comment

Economic activity in the United States continued to improve over the last month, helped by the manufacturing and retail sectors, but the disaster in Japan and higher energy prices created new uncertainty about the outlook, according to a survey of the Federal Reserve’s 12 districts released on Wednesday.

The central bank report on economic activity, called the beige book, reported a “steady improvement” in manufacturing, often including hiring, and at least 10 districts cited “slight gains” in consumer spending.

Economic improvement was mostly described as moderate by many districts, according to the data collected up until April 4.

In highlighting manufacturing and retail, the latest report was similar to one released in March, which said the economy expanded at a “modest to moderate” pace as those sectors grew in all but a few regions of the country.

The report released on Wednesday also said that labor markets in many districts showed improvement. In the Boston, Chicago, Kansas City and Richmond districts, the Fed said some companies were concerned about their ability to attract certain types of skilled workers. In the Philadelphia and Cleveland districts, meanwhile, some firms said they still said they preferred to hire temporary, rather than permanent, workers.

While it focused on the major sectors of the domestic economy, the beige book also took into account global events, like the recent earthquake, tsunami and nuclear crisis in Japan.

At least seven districts noted actual or expected disruptions to sales and production as a result of the disaster in Japan.

That included a Richmond car dealer who reported restrictions on ordering certain cars colored with paints from Japan.

March was also a month of some of the highest commodity prices since September 2008. Unrest in the Middle East also took its toll. Natural resource businesses in Atlanta reported increased uncertainty as a result on outlooks for investment and hiring, the report said.

In Dallas, many companies, especially those in high-tech manufacturing, said uncertainty about events in Japan and the Middle East would hit their business and could harm profits.

The Fed report said that Japanese tourist visits to Hawaii fell, while in Boston, manufacturers that used electronic components were concerned about supply-chain disruptions.

In Minneapolis, a logistics consulting firm noted an increase in demand because companies were adjusting to disruptions caused by the disaster in Japan.

While the report provides a roundup of economic activity, it also serves as a tool to anticipate whether there will be any changes in Fed policy.

The report said, for example, that wage pressures were described by most districts as weak or subdued and that higher commodity costs were putting increasing pressures on prices.

“Energy prices were cited most often, but raw materials in general were an increasing concern of businesses,” the report said.

The ability to pass through cost increases varied. There was generally less resistance to price increases in the manufacturing sector than there was in retail or construction, where weak demand was a limiting factor, the report said.

John Canally, an economist for LPL Financial, said that for the fourth consecutive month, the report raised some concern about pricing pressures. But he concluded that it did not appear to be enough for the Federal Open Market Committee, the policy-making arm of the Federal Reserve, to change its monetary policy later this month.

“I don’t think they are even going to signal it,” said Mr. Canally. “You need widespread wage price pressure.”

“If the trend continues the way it has continued, by June they might have enough evidence to say we are seeing wage pressures bubble up and maybe we need to start thinking about taking away some stimulus,” he said.

Article source: http://feeds.nytimes.com/click.phdo?i=d182a2a6d3ba3351239d3f4e2a222451

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O.E.C.D. Lifts Global Growth Forecasts

April 5, 2011 by Leave a Comment

PARIS — The global recovery is taking root, despite the recent earthquake in Japan, helped primarily by better conditions for companies and improving labor markets, an international economic organization said Tuesday as it bumped up its growth forecasts.

Growth in the Group of 7 industrialized economies, excluding Japan, should rise to an annualized rate of about 3 percent by the middle of this year, from about 2 percent at the end of 2010, the Organization for Economic Cooperation and Development said in an interim update to its annual economic report.

The organization said that the recovery was becoming “self-sustained,” and that corporate balance sheets — not counting banks and other financial services companies — looked “very healthy.”

Despite unemployment rates that are still high in many countries, overall developments in labor markets look better than expected a few months ago, which should have a favorable impact on private consumption, it said.

“The underlying momentum in economic growth in most countries appears stronger than in earlier projections,” the report said.

The O.E.C.D. did not provide specific annualized forecasts for the Japanese economy because of the difficulty in assessing the effects of the earthquake and tsunami. But it said that growth in Japan might have been reduced by 0.2 to 0.6 percentage points in the first quarter of this year and may slip by 0.5 to 1.4 percentage points in the second quarter.

This takes account of the impact of the disaster on production in the areas hit directly, the rationing of power, the decline to confidence and supply chain disruptions.

Reconstruction efforts are likely to begin relatively quickly, it said, and these could begin to outweigh the negative effects on G.D.P. by the third quarter.

The O.E.C.D. forecast annualized growth in the United States of 3.4 percent by the end of the second quarter; 2.2 percent for the 17-nation euro area; and just 1 percent for Britain, the weakest of the major economies surveyed.

It added that given rising prices in some O.E.C.D. countries, “monetary policy will need to deal with a risk that inflation expectations may become un-anchored.”

Public finances “remain in distress in most O.E.C.D. countries,” it said, and the priority should be “to consolidate budgets and establish credible and growth-friendly medium-term plans.”

Article source: http://www.nytimes.com/2011/04/06/business/global/06oecd.html?partner=rss&emc=rss

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