OECD: Who Needs China?

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The Organization for Economic Co-operation and Development (OECD) released its “Interim Economic Assessment” for 2013. The agency expects modest growth in global gross domestic product (GDP), a point of view held by many economists. What is unexpected in the report is that its authors downplay the importance of China. It is no longer the most critical aspect of worldwide expansion.

The document was marked by two statements:

Growth in the second quarter in the major advanced economies as a whole was stronger than forecast. The United States continued to recover, despite headwinds from sharp fiscal consolidation,and the Japanese economy rebounded in the first half of the year under more expansionary policies. Euro area GDP in the second quarter bounced back from a period of exceptional weakness in late 2012 and the first quarter of 2013, ending six quarters of contraction, although several countries remained in recession. In the United Kingdom, growth picked up momentum through the first half of the year.

Based on recent indicators, growth for the major advanced economies as a whole in the second half of 2013 is forecast to continue at the improved rate seen in the second quarter.

And:

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.

In other words, China will no longer grow at double-digit rates. One probable cause is that its middle class has stopped expanding at earlier rates. This likely is because its manufacturing activity has slowed, as recent PMI data show. Also, wages have not spiked up at past rates, probably because manufacturing growth inside China will not support it. Consumer activity by China’s huge middle class, often numbered at 250 million, will not offset a drop in exports.

In the advanced economies, the damage of the recession was historically severe. However, in the eyes of the OECD, America may stage a significant recovery, if it can dodge headwinds. The U.S. deficit has to be counted among these because it has caused a move toward government austerity, which could slow GDP as a whole. On the other side of the argument is ongoing quantitative easing (QE) from the Federal Reserve, which may drop off, but will be a major economic force for at least a year. Unemployment remains too high but continues to come down. European Union improvement also will help export activity.

Europe has started to escape the darkest economic period of the past eighty years. The recovery has centered in Germany, which because of its size is critical. Even Spain has shown a flicker of improvement. The situations in France and Italy may be relatively bad, but they have not gotten worse in the past month or so. Government policy in Japan, particularly the Bank of Japan, already has begun to shake the nation from its GDP growth doldrums.

The prescriptions the OECD has given for a full recovery worldwide look very like those of the International Monetary Fund (IMF). Government reforms must be put in place to improve employment and prevent another financial meltdown. The benefits of austerity were never present. Economic stimulus is a much more likely path to recovery. Put another way, politicians will decide the improvement of global GDP more than bankers or businesses. The OECD’s headline conclusions indicate as much:

While the improvement in growth momentum in OECD economies is welcome, a sustainable recovery is not yet firmly established and important risks remain. It is necessary to continue to support demand, including through unconventional monetary policies, in order to minimise the risk of the recovery being derailed. Meanwhile, both advanced and emerging economies face the challenge of slower trend growth.Therefore, reforms to boost growth, rebalance the global economy and reduce structural impediments to job creation re main vital

The assessment may not be unique, but the modest presence of China in the process is.

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