Here’s something for stock market bulls to latch on to — the latest OECD Economic Outlook report.
In spite of the turmoil in the eurozone, the OECD has actually revised GDP forecasts for its 31 member countries upwards:
Gross domestic product (GDP) across OECD countries is projected to rise by 2.7% this year and by 2.8% in 2011. These are upward revisions from the previous, November 2009, forecasts of OECD-wide GDP growth of 1.9% in 2010 and 2.5% in 2011. In the US, activity is projected to rise by 3.2% this year and by a further 3.2% in 2011. Euro area growth is forecast at 1.2% this year and 1.8% next while, in Japan, GDP is expected to expand by 3.0% in 2010 and by 2.0% in 2011.
But, sadly, that is about as good as things get, because the OECD sees threats from just above everywhere.
First, there’s the possibility of a blow-up in China:
Strong growth in China and other emerging markets is helping to pull other countries out of recession. But at the same time, the risk of overheating and inflation is growing in emerging markets. A boom-bust scenario cannot be ruled out, requiring a further tightening in countries such as China and India. The knock-on effect would be slower growth in other regions. Exchange rate flexibility could ease some of the pressure on Chinese monetary policy and provide more scope for addressing domestic inflation, says the OECD.
And then, of course, there’s the sovereign debt crisis in Europe:
Instability in sovereign debt markets poses another serious risk. It has highlighted the need for the euro area to strengthen its institutional and operational architecture. Bolder measures need to be taken to ensure fiscal discipline, says the Outlook.Several countries are already taking early action to enhance the credibility of their fiscal consolidation plans and this is very welcome.
And finally the political dimension:
The Outlook also contains some scenarios that go out as far as 2025, and which show that without strong policy decisions, growth will remain mediocre, unemployment and fiscal deficits high and imbalances persistent.
In fact, the OECD says that the exit from exceptional fiscal support must start now, or by 2011 at the latest:
With a huge debt burden weighing on many OECD countries and the strengthening recovery, the emergency fiscal measures provided by governments to tackle the crisis must be removed by 2011 at the latest, the Outlook says. It adds that the pace of such action must be appropriate to particular conditions and the state of public finances in each country.
To support growth as budgets are being tightened, macroeconomic, financial and structural policies need to be linked. Spending cuts or tax rises should focus on areas that are the least harmful to growth. Fiscal rules could enhance the credibility of plans to strengthen public finances. Reforming product and labour markets to enhance competitivity must also be part of the strategy.
Not time for the rally monkey just yet, then.
Related link:
OECD urges tax rises and spending cuts – FT