Last week, the financial news and analyses focused on the Organization for Economic Cooperation and Development's (OECD) 265-page June 2009 “Economic Outlook” report, which, published twice a year, surveys the major trends and suggests the economic policies essential for high and sustainable growth in its member countries. The June report presents the outlook until the end of 2010 for both OECD member countries, including Turkey, and selected non-OECD countries, covering over 80 percent of the global economy.
Since the macroeconomic projections for 2009 and 2010, more encouraging than those from last March, have already been widely reported in the Turkish press, including Today's Zaman, I will omit them. Instead, I will draw attention to the report's significance in highlighting an improving global economic outlook -- in terms of economic growth projections revised upward for the first time in two years -- for the OECD area as a whole, if not for all member countries. The report concludes, “It looks as if the worst scenario has been avoided and that OECD economies are now nearing the bottom,” which is expected in the second half of this year. A slow recovery is expected to begin late in the year. The report credits unconventional massive fiscal and monetary stimuli as well as financial sector stabilization policies for accelerating these relatively positive developments toward recovery.
Among the recent favorable signs, the OECD report includes: (1) lower money market spreads, such as three-month London Interbank Offered Rate (LIBOR) and the US overnight indexed swap rate, as well as lower credit default swap rates and emerging market bond spreads, indicating increasing confidence in the financial sector; (2) higher equity market prices; (3) higher synthetic indicators of financial conditions, such as corporate bond spreads, bank lending standards, housing and financial wealth, policy interest rates, government bond yields and exchange rates, indicating a more auspicious financial basis for future economic growth; (4) higher commodity prices and bond yields; (5) more stable high-frequency economic activity indicators used to estimate gross domestic product (GDP) growth in successive quarters; and (6) higher business confidence indices.
The emergence of cautious optimism is supported by sources besides the OECD. There were also signs that gave cause for cautious optimism in the US financial sector and the non-financial economy.
According to the statement released after the Federal Reserve's Open Market Committee meeting last week, “the pace of economic contraction is slowing” and the “conditions in financial markets have generally improved in recent months.” The day after the meeting, the Fed announced that it would begin to scale back its aggressive emergency support programs for the US financial system. Also last week, the US Department of Commerce announced that new orders for durable goods, especially new machinery, jumped in May for the second consecutive month. According to its revised estimates, the US GDP fell at an annual rate of 5.5 percent in the first quarter, not only better than expected, but also smaller than its initial estimate of a 6.1 percent drop and last month's estimate of a 5.7 percent contraction as well as the 6.3 percent contraction in the last quarter of 2008. US home re-sales as well as housing starts both jumped sharply in May. According to the latest Reuters/University of Michigan US consumer survey, confidence jumped to 70.8, its highest level in 16 months, from 68.7 in May, recording its fourth monthly consecutive rise. According to the concluding statement of the International Monetary Fund (IMF) mission's 2009 Article IV Consultation with the US, “the sharp fall in economic activity has slowed notably, while financial conditions have improved noticeably.” The IMF's first deputy managing director, John Lipsky, confirmed the emergence of cautious optimism for the global economy in two recent speeches, one given to the Turkish Industrialists and Businessmen's Association (TÜSİAD) in Bodrum on June 19 and the other at an IMF-organized conference in Paris on June 26.
In case we get carried away with the good news from the OECD and elsewhere about reaching the bottom of the global crisis before the end of the year, we should keep in mind that even after the recovery, there will be plenty of costs to pay for the crisis, resulting in considerable permanent damage. Besides surveying the usual topics, the OECD's June 2009 “Economic Outlook” report offers a special concluding chapter, titled “Beyond the crisis: Medium-term challenges relating to potential growth, unemployment and fiscal positions.” This chapter focuses on a set of potentially severe problems with long-lasting negative effects that will confront policymakers as the recovery gets under way. The global crisis -- even after it is over -- is expected to reduce the rate of growth in potential output, lower capital intensity as capital costs rise and raise the non-accelerating inflation rate of unemployment, especially in Europe. The post-crisis macroeconomic imbalances, such as huge output gaps between actual output and potential output, high unemployment, gaping fiscal deficits and low inflation bordering on deflation will be challenging. (The OECD glosses over the risk of high inflation that could result from monetized excessive budget deficits or aggressive quantitative easing in monetary policy.) The fiscal deficits could be aggravated by lower potential output and higher interest rates. The analysis that emphasizes the required fiscal consolidation (either higher taxes or lower expenditures) is based on a medium-term stylized scenario to 2017 involving such macroeconomic variables as real GDP growth, unemployment, inflation and long-term interest rates for individual OECD countries. Turkey is excluded from this analysis, presumably due to lack of adequate data.
