A joint press conference with former EU Commissioner László Kovács and Secretary General of the OECD Angel Gurría
The Organization of Economic Co-Operation and Development (OECD) released their Economic Outlook for 2014 on November 6th. Prepared by the OECD Economics Department, the report analyzes all the member countries and comments on output, current balances, employment and commodity prices.
According to the Outlook, global GDP is projected to grow at a rate of 3.3 percent before accelerating to 3.7 percent in 2015, and 3.9 percent in 2016. The report recognizes that presently, the global economy is stuck in first gear, but growth is expected to accelerate gradually if countries implement growth-supportive policies.
The United States’ recovery, relative to the recovery of other developed countries, remains robust, and the economy is projected to grow by 2.2 percent in 2014 and around 3 percent in both 2015 and 2016. The Eurozone is also expected to grow, from 0.8 percent in 2014 to 1.1 percent in 2015 and 1.7 percent in 2016. India, in the wake of increased investment, is projected to grow at 5.4 percent in 2014, 6.4 percent in 2015 and 6.6 percent in 2016. China’s growth is projected to decelerate a little, from 7.4 percent in 2014 to around 7 percent in 2015-2016 because of its efforts to rebalance its economy and start their transition to clean energy.
However, the report also flagged some major issues. Even though private sector confidence is rebuilding, financial risks remain high and US’ tightening monetary policy could increase market volatility. The fear of stagnation and low inflation in the Euro Zone has also affected global demand is also listed as a cause for major concern. High levels of debt in some advanced and emerging economies also raise questions about their financial stability and their ability to maintain their economies. However, the OECD warns that the most immediate threat to global economy arises from the US and its debt ceilings.
“Brinkmanship over fiscal policy in the United States remains a key risk and uncertainty,” commented Angel Gurria, the secretary general of OECD, at a news conference in Paris on Tuesday.
The OECD proposes that the debt ceiling should be abolished and replaced by “a credible long-term budgetary consolidation plan with solid political support.”
The group sets the goal of lowering the budget deficit by 3.3 percent to prevent major “spill over effects” into other markets and economies. If the US keeps extending its borrowing limit, it is likely to experience financial instability, which will have adverse effects on the global economy. The report analyzed four separate macroeconomic scenarios to gauge the effects of US cutting its spending. After modeling the data, it is projected that a budget deficit decrease of 4-5 percent in US will send the economy into varying degrees of recession, and the shocks would be felt globally. If US reduced their budget deficit by 6.5 percent of the GDP, all 34 members of the OECD will be in recession. And since the member BRICS countries are increasingly amassing higher shares of global GDP, the lack of growth will have far reaching consequences.
However, despite the potential turbulence that could arise from decreased deficit spending, OECD recommends the US to begin tapering off a 85 billion per-month bond buying program for the year 2015 because the issue of continuously rising debt is detrimental to the confidence levels of investors and ultimately stalls their growth
The OECD issued a similar cautionary statement in 2012, but no steps were taken. Policy inaction and mistakes in the future could have far more severe consequences than the turbulence seen to date, and could jeopardize growth for years to come.
Puneet Brar is a sophomore at Cornell University, majoring in Environmental Science & Sustainability and minoring in Policy Analysis & Management.
Image Attribution: “Four more countries commit to OECD tax standards” by OECD, licensed under CC BY-NC-ND 2.0