PARIS (MNI) – As the global recovery regains momentum after a “soft
patch” last year, monetary policy in emerging economies will have to
counter mounting price pressures, while policy normalization can proceed
more slowly in advanced economies, the Organization for Economic
Cooperation and Development said Wednesday.
In its spring Economic Outlook, the organization forecast global
growth of 4.2% this year and 4.6% next year, with world trade expanding
by 8.1% and 8.4%, respectively.
“Most risks are on the downside,” said OECD chief economist Pier
Carlo Padoan in the introduction to the report, citing rising
commodities prices that “could feed into core inflation;” a deeper
slowdown in China; the Eurozone debt crisis; fiscal uncertainties in the
United States and Japan, and renewed weakness in housing markets.
“A concern is that, if downside risks interact, their cumulative
impact could weaken the recovery significantly, possibly triggering
stagflationary developments in some advanced economies,” Padoan warned.
“All this suggests that the global crisis may not be over yet.”
In emerging economies, where robust domestic demand, negative
supply shocks and strong capital inflows are generating inflationary
pressures, “monetary policy should tighten more,” the economist said.
“But this option risks being constrained by inducing stronger capital
inflows.”
In most of the OECD’s member countries, headline inflation is
rising and “expectations are also drifting up,” he said. “However,
underlying inflation seems likely to edge up only slowly.”
The projections see annual inflation rates in the OECD peaking in
the third quarter of this year at 2.4%, with a high of 2.9% in the
Eurozone, a low of 0.8% in Japan, and the US in between at 2.1%. A
slowdown to 1.7% for the OECD area is expected next year, with mildly
negative rates in Japan from 2Q onward.
“In advanced economies, structural reforms can boost potential
growth, thereby facilitating fiscal consolidation and easing the pace of
monetary policy normalization,” Padoan said.
Monetary tightening in the Eurozone is expected to accelerate next
year, boosting short-term rates from 1.5% in 1Q to 2.3% by 4Q. The
Federal Reserve is seen waiting until the end of this year before hiking
rates, then advancing faster next year to lift short-term US rates to
2.5% by year’s end. In Japan, short-term rates are expected to hover
around 0.2% until the end of 2012.
While the recovery is becoming “self-sustained and more broad
based,” global imbalances “have been widening again,” the chief
economist noted. “The policy challenge is not to eliminate imbalances
but to keep them sustainable, so as to facilitate international
reallocation of savings in ways that are supportive of growth. This
requires open and long-term-oriented capital markets.”
“A desirable rebalancing mechanism should be growth-enhancing and
sufficiently symmetric to avoid putting an excessive burden on deficit
countries,” he argued.
“Such a rebalancing would require more exchange-rate flexibility,
which could also help mitigate inflationary pressures in countries where
these are strong, while country-specific structural reforms could help
to reduce saving and raise investment in surplus countries, and boost
saving in deficit countries.”
Structural reforms to bolster growth are critical at this stage,
since sluggish activity “would feed back negatively on fiscal
consolidation,” Padoan warned.
The US and Japan have yet to produce “credible” medium-term plans
to stabilize debt levels and other countries need to bolster medium-term
fiscal targets, he said. Policy responses are more urgent now, since
interest rates will eventually surpass growth rates as central banks
tighten.
“Structural reforms, while boosting growth, can also help fiscal
consolidation by increasing efficiency in the provision of key services
such as health and education,” Padoan said.
“Finally, it would be dangerous to believe that higher inflation
could address debt sustainability,” he warned.
“Higher and persistent inflation could damp real growth by raising
price and exchange-rate volatility. It could also risk unhinging
inflation expectations, with the result that interest rates would soon
increase more than inflation.”
–Paris newsroom +331 4271 5540; e-mail: stephen@marketnews.com
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