The OECD in an economic forecast released tonight predicts that growth in Australia should remain moderate at 2½ per cent in 2014, before gradually accelerating toward its potential rate of 3% in 2015. The slower pace of mining investment,the organisation argues, should be offset by the gradual strengthening of non-mining sectors, which will benefit from recent improvements in confidence, the currently lower exchange rate and expansionary monetary policy.
In the absence of inflationary pressures, a continued policy of monetary accommodation will be needed to sustain demand once the mining investment cycle comes to an end. It will also be important to avoid any additional tightening of fiscal policy in the short term above that already factored in. The authorities’ medium-term objective of restoring some room for manoeuvre on fiscal policy is welcome. This should be accompanied by a tax reform that will make real estate taxation more efficient and reduce the corporate tax burden to encourage the restructuring now underway in the economy.
The OECD’s economic forecast for the global economy is for continued expansion at a moderate pace over the coming two years, “but policymakers must ensure that instability in financial markets and underlying fragility in some major economies are not allowed to derail growth.”
“The recovery is real, but at a slow speed, and there may be turbulence on the horizon,” OECD Secretary-General Angel Gurría said during the Outlook launch in Paris. “There is a risk of another bout of brinkmanship in the US, and there is also a risk that tapering of asset purchases by the US Federal Reserve could bring a renewed bout of instability. The exit from non-conventional monetary policy will be challenging, but so will action to prevent another flare-up in the euro area and to ensure that Japan’s growth prospects and fiscal targets are achieved,” Mr Gurría said.
GDP growth across the 34-member OECD is projected to accelerate from this year’s 1.2% rate to a 2.3% rate in 2014 and a 2.7% rate in 2015, according to the Outlook. The world economy, by contrast, will grow at a 2.7% rate this year, before accelerating to a 3.6% rate in 2014 and 3.9% in 2015. The pace of the global recovery is weaker than forecast last May, largely as a result of the worsened outlook for some emerging economies.
Growth in the United States is projected at a 2.9% rate in 2014 and a 3.4% rate in 2015. In Japan, GDP is expected to drop to a 1.5% growth rate in 2014 and a 1% rate in 2015. The euro area is expected to witness a gradual recovery, with growth of 1% in 2014 and 1.6% in 2015.
Growth has begun picking up in China but will remain weaker than previously projected in most other major emerging market economies. A group of emerging OECD member countries – Chile, Turkey, Mexico, Korea and Israel – will continue out-pacing growth in other advanced economies.
The Outlook draws attention to a range of downside risks in this recovery, which is still weak by past standards. It points to a worrisome slowdown in world trade growth, in foreign direct investment flows and in fixed investment, as well as continuation of stubbornly high unemployment, particularly in Europe, where it is only expected to fall below 12% by the end of 2015.
The OECD says US monetary policy should remain accommodative, while proposing a gradual winding down of asset purchases by the Federal Reserve, to limit impacts on vulnerable emerging-market economies. It calls for an end to fiscal deadlock in the United States, through the abolition of the nominal debt ceiling and implementation of a co-ordinated medium-term fiscal plan.