Advanced economies grow, emerging ones struggle

Advanced economies are recovering moderately while emerging ones are seeing slower growth, according to an Interim Economic Assessment by the OECD (Organization for Economic Co-operation and Development).

North America, UK and Japan are seeing encouraging rates of growth and the Eurozone is out of recession. However, some euro area countries are still struggling.

Many of the larger emerging economics are growing at a much slower rate today. The OECD says this is partly due to the rise in global bond yields as the US Federal Reserve’s quantitative easing is expected to be scaled back.

This has triggered market instability and capital outflows in India, Indonesia and other major emerging economies.

Emerging economies now account for a significantly larger share of the world economy. So, the slowdown in the major ones will have a noticeable effect on short-term growth globally, despite the recovery in the economies of the rich nations.

The OECD forecasts continued economic growth in the major advanced economies during the second half of 2013.

In The US, Germany and Japan, economic growth is expected to grow by 2.5% annualized in the second half of 2013.

Experts believe France will grow by 1.5% annualized and Italy will experience a slight contraction.

During Q4 of 2013, China is expected to grow by 8%, after a comparatively sluggish first six months of the year. Even so, 8% compared to previous years is moderate.

Jorgen Elmeskov, OECD Deputy Chief Economist, during the presentation of the Assessment in Paris, said:

“The gradual pick-up in momentum in the advanced economies is encouraging but a sustainable recovery is not yet firmly established. Major risks remain. The euro area is still vulnerable to renewed financial markets, banking and sovereign debt tensions. High levels of debt in some emerging markets have increased their vulnerability to financial shocks. And a renewal of brinksmanship over fiscal policy in the US could weaken confidence and trigger new episodes of financial turmoil.

Continued support for demand is still needed to make sure recovery takes hold, and it remains vital that this be complemented by structural reforms to boost growth, rebalance the global economy and avoid a ratcheting-up of structural unemployment.”

Unemployment a high priority

Governments must focus aggressively on tackling high unemployment, the OECD emphasized. Unemployment in the USA at 7.5% and 12% in the Eurozone are much higher than during pre-crisis levels.

In order to prevent unemployment rates from becoming entrenched, governments need to implement effective training programs and activation policies, as well as supporting stronger demand.

The OECD also encourages governments to reform tax-benefit systems, which should improve work incentives “while targeted measures are needed for vulnerable groups such as jobless young people outside the training and education system”.

With the exception of Japan, the Assessment notes that public finances in the most advanced economies have been improving – it urges countries to continue with policies of fiscal consolidation.

However, fiscal consolidation policies need to be designed in a way that protects the most vulnerable in society.