The Daily Business Post, Published: 15/09/2014
Euro-zone gross domestic product is now expected to expand 0.8 per cent this year, down from 1.2 per cent in May, while the US will expand 2.1 per cent instead of 2.6 per cent, the Paris-based Organisation for Economic Cooperation and Development said.
“The bullishness of financial markets appears at odds with the intensification of several significant risks,” the organisation said. “Continued slow growth in the euro area is the most worrying feature of the projections.”
The MSCI All Country World Index has gained six per cent this year even as conflicts in the Ukraine and the Middle East have intensified and inflation in the euro zone has dipped to a fraction of the European Central Bank’s target rate.
The OECD, which advises its 34 member governments on economic policy, urged European officials to learn lessons from Japan where inflation expectations didn’t flag a later descent into deflation.
“The experience of Japan in the 1990s is a reminder that such expectations measures can be poor predictors of the actual future rate of inflation,” the OECD said. “The six-to-10 year consensus expectations in Japan were similarly near two per cent in the early 1990s, failing to foresee the descent into deflation.”
The OECD cut its GDP forecasts for Germany, France and Italy to 1.5 per cent, 0.4 per cent and a contraction of 0.4 per cent, respectively. In 2015, those economies will grow 1.5 per cent, one percent and 0.1 per cent, generating growth of 1.1 per cent for the euro zone as a whole.
Similarly, in Brazil the OECD foresees a weak investment and uncertainty related to looming elections as keeping growth below potential at 0.3 per cent this year and 1.4 per cent in 2015.
The outlook for other economies is brighter. The OECD sees Japan expanding 0.9 per cent this year and 1.1 per cent in 2015, while China is on track to grow 7.4 per cent and 7.3 per cent. India, the only major economy to have its growth forecast raised this year, will expand 5.7 per cent in 2014 and 5.9 per cent next year, the OECD said.
The OECD sees US GDP growing 3.1 per cent in 2015.
Growth in the UK is currently pegged at 3.1 per cent in 2014 and 2.8 per cent next year.
“In the U.S., the moderate underlying expansion remains broadly on track,” the OECD said. “China has so far managed to achieve an orderly growth slowdown” and “in India, confidence and spending have improved markedly during 2014 as a result of progress to control inflation and the perception that the new government will reinvigorate growth-oriented reform.”