LONDON (MNI) - The Organisation for Economic Co-Operation and Development said Tuesday that the slowing pace of growth in emerging market economies will offset the stronger pace of advances seen in developed countries and urged central bankers to continue supporting the recovery with loose monetary policies.
In its regular Interim Economic Assessment report, published in Paris, the OECD cut its 2013 growth forecasts for both the United States and China but raised estimates for Germany, Britain, France and Canada while leaving Italy's outlook unchanged. The group cautioned, however, that a sustainable global recovery will still require both continued support from central banks and a committed programme of structural reforms and job creation from national governments.
"The pace of recovery in the major advanced economies improved in the second quarter and growth is expected to be maintained at a similar rate in the second half of the year," the OECD said. "In several major emerging economies, however, growth has slowed. While growth in China appears to have passed the trough, financial market turbulence - partly triggered by discussion of a tapering of quantitative easing in the United States - has highlighted difficulties facing a number of other emerging economies, especially those with large current account deficits."
The OECD said these countries have been most affected by the rise in global bond yields that has accompanied signals from the US Federal Reserve that it may begin slowing the pace of its $85 billion in monthly fixed income purchases. The OECD says this has slowed capital inflows and blunted currency appreciation.
"Growth prospects in this new situation vary across emerging economies." the report said. "Growth in China has seemingly already passed the trough and looks set to recover further in the second half of 2013, although the expansion is still expected to be more subdued than in earlier cycles. However, in a number of other emerging economies the recent financial market tensions and weak momentum suggest both a reappraisal of trend growth and deterioration in cyclical conditions."
The OECD said global monetary policy remains the key to supporting a sustainable recovery amid high unemployment and tepid inflation, even as it stressed the varying needs of different central banks.
"In the United States, it would be appropriate for the Federal Reserve gradually to reduce the rate of bond purchases, while continuing to keep policy interest rates low for some time in line with existing forward guidance," the report said.
Job creation, the OECD said, is another key to establishing a sustainable recovery and urged more effective training policies and tax-benefit system reforms be put into place. The report also warned of the social tensions that high unemployment can create in emerging market economies.
"Weak employment, sluggish global growth and lingering global imbalances underline the need for structural policies - in addition to those to support demand - to create jobs, raise growth, ease fiscal pressures and permanently reduce external imbalances."
The report noted the need for continued fiscal consolidation, particularly in advanced economies such as Japan, but said the situation had improved from its last assessment. It called on the United States to set out a credible near-term fiscal strategy but cautioned that all reform programmes must take note of the social impact they will inevitably have.
"It remains vital to maintain public support and to protect the most vulnerable groups," the report said. "Consolidation packages should be better designed, including by prioritising spending to help people get back to work and mitigate inequality."
Advanced countries should also engage their financial sectors to improve the incentives for banks to lend to the real economy, the report said, noting that persistently weak investment had slowed the growth of capital and could hold back demand as the recovery attempts to gain traction. It also flagged up trade barriers as an urgent need for attention.
"Greater progress towards removing obstacles to trade would help to boost productivity growth and give a new impetus to flagging growth of trade volumes," the report said. "This requires progress on bilateral and regional free trade agreements alongside multilateral discussions. Reforms to remove restrictive product market regulations and greater efforts at trade facilitation would reinforce such agreements."
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