OECD Economic Outlook

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The OECD Economic Outlook is the OECD’s twice-yearly analysis of the major economic trends and prospects for the next two years. Prepared by the OECD Economics Department, the Outlook puts forward a consistent set of projections for output, employment, government spending, prices and current balances based on a review of each member country and of the induced effect on each of them on international developments.

Coverage is provided for all OECD member countries as well as for selected non-member countries. Each issue includes a general assessment, chapters summarizing developments and providing projections for each individual country, three to five chapters on topics of current interest such as housing, and an extensive statistical annex with a wide variety of variables including general debt.
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OECD Economic Outlook, Volume 2008 Issue 2

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25 Nov 2008
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This December 2008 edition of the OECD Economic Outlook presents OECD's first set of economic analysis and projections since the financial crisis began. As always, it includes and overall assessment as well as individual country assessments for OECD and major non-OECD economies, and an extensive statistical annex.  This edition's special feature covers responses to inflation shocks.
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  • Managing the Global Financial Crisis and Economic Downturn
    Many OECD economies are in or are on the verge of a protracted recession of a magnitude not experienced since the early 1980s. As a result, the number of unemployed in the OECD area could rise by 8 million over the next two years. At the same time, inflation will abate in all OECD countries and some even face a risk, albeit small, of deflation.
  • General Assessment of the Macroeconomic Situation
    Massive government and central bank intervention to provide capital, liquidity and guarantees has averted the immediate risk of systemic failure of the financial system. Nevertheless, mistrust remains rife within the banking system and, together with ongoing de-leveraging to repair bank balance sheets, is impairing the flow of credit in many OECD countries. The financial crisis has spread to a wider range of institutions and markets, including emerging economies, which until quite recently seemed to have been relatively unscathed, and there have been huge falls in global financial wealth. The malfunctioning of financial markets will be the key factor weighing on activity going forward. Related to this to some extent, and further acting as a break on growth, will be the ongoing adjustment in housing markets, which is now a feature of almost all OECD countries. Weaker oil and other commodity prices will provide some relief by boosting real household incomes.
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  • Expand / Collapse Hide / Show all Abstracts Developments in individual OECD countries

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    • United States
      The US economy is facing extremely difficult conditions. The financial crisis has intensified at a time when growth had already been weakened by the prolonged housing downturn. A credit crunch is likely to result in a pronounced contraction in activity over the near term and a further deterioration of the labour market. Once financial conditions normalise, GDP growth should resume but at a slower pace than in past recoveries, in part because of negative wealth effects. In response to lower commodity prices and the opening of a large output gap, inflation should recede significantly to around 1½ per cent in 2010.
    • Japan
      External shocks from the run-up in commodity prices and then international financial turbulence have brought Japan’s expansion to an end. Equity prices have plummeted and the yen has appreciated substantially. With falling exports, activity is projected to remain weak through 2009, pushing up unemployment and reducing headline inflation to near zero. A recovery in domestic demand is projected to lift output growth to around 1% during 2010, still short of the growth of potential.
    • Euro Area
      The euro area economy has slipped into recession this year, with tighter financial conditions, negative wealth effects, weaker housing market activity and greater uncertainty all reducing domestic demand. Growth is expected to remain below potential until the middle of 2010, before picking-up as the effects of monetary policy easing and the dissipation of stress in global financial markets emerge. Lower commodity prices and the emergence of a sizable negative output gap will dampen inflationary pressures, with headline inflation projected to fall to around 1½ per cent during 2009.
    • Germany
      After a strong start into 2008, activity has contracted reflecting muted consumption and weakening export growth. Activity is projected to contract further in 2009 on the back of falling investment spending and weakness in the main trading partner economies. Private consumption will make a small positive contribution to growth because disinflation increases the purchasing power of past wage settlements. Activity is expected to pick up in late 2009 and return towards trend growth rates in the second half of 2010.
    • France
      Growth is likely to fall below 1% in 2008 as a whole amid sharply deteriorating global economic conditions in the latter part of the year, due primarily to the financial crisis. The impact of this turbulence will reverberate well into 2009, with negative growth expected until the middle of the year, followed by a gradual pick-up of activity to above-potential rates by mid-2010.
    • Italy
      The recession in Italy, which began early this year, is likely to extend through much of 2009, as in many other OECD countries. Global financial turmoil hit an economy already weakened by several years of low productivity growth, deteriorating competitiveness and high public debt, though solid job creation and falling unemployment had been bright spots. Recovering confidence towards the end of 2009 should allow output to accelerate significantly during 2010.
    • United Kingdom
      Economic conditions have deteriorated markedly and forward-looking indicators suggest a further sharp weakening in activity over the next quarters. The adjustment in the construction sector is expected to continue, while house prices are likely to fall further. These factors, combined with turmoil in the banking and financial sectors, are already cutting domestic demand. Growth may resume only in late 2009. Unemployment is set to rise rapidly, but should stabilise in 2010. Inflation should recede, reflecting the recent falls in energy and food prices and the increasing output gap.
    • Canada
      The economic downturn that started in 2007, as exports slowed in response to the deflating US housing bubble, continues to worsen. Sharply deteriorating conditions in global financial markets, generalised softness in the US economy and receding commodity prices are amplifying export weakness and dragging down domestic spending. Output has been contracting since August 2008, and slack is projected to grow until the global financial crisis has run its course and external demand bounces back in 2010. The domestic banking and housing sectors are in relatively good shape, however, and no government bail-outs have taken place.
    • Australia
      GDP growth could well weaken from 2½ per cent in 2008 to around 1¾ per cent in 2009 before picking up to 2¾ per cent in 2010. This would still imply that, despite the depressed international environment, the impact of the financial crisis and the fall in the terms of trade should be relatively contained. Unemployment is likely to increase, however, and inflation may dip below 3% in 2010.
    • Austria
      Largely as a result of a worsening external environment, growth has declined and the economy is set to contract in 2009 before recovering in 2010. Headline inflation is projected to ease as energy and food prices fall, economic slack increases and import prices decelerate.
    • Belgium
      Activity is projected to contract slightly and, thereafter, growth may remain below potential well into 2010, before rebounding on the back of easier monetary conditions, renewed growth in real incomes and a recovery in world trade. As a result, unemployment will increase over the projection period. Headline inflation should decline with the fall in energy and food prices, although core inflation should show more persistence.
    • Czech Republic
      Growth slowed in the first half of 2008 and is not expected to return to trend again until 2010. The slowdown started with weaker domestic demand in 2008, as the inflation spike eroded consumers' purchasing power, and will continue as export market growth slows. The rebound is projected to be driven by both private consumption and exports. Inflation is expected to decelerate substantially in 2009 as the impact of one-off government measures wears off and global energy and commodity prices fall.
    • Denmark
      After years of strong expansion, the construction boom is now over and falling house prices have put an end to debt-financed consumption growth. As the impact of global financial turmoil materialises, exports are likely to remain weak during 2009, leading businesses to cut back investment.
    • Finland
      Economic activity has slowed substantially, mainly due to a decline in investment. Output growth is projected to be subdued in 2009, before recovering during 2010. Unemployment is likely to drift up during 2009, but should stabilise in 2010. Lower commodity prices and growing slack in the economy should bring down inflation from the current high rate.
    • Greece
      Economic activity has already weakened due to slowing domestic demand. Growth is expected to be subdued until mid-2009 in the context of a sluggish external environment, but to firm gradually thereafter. Inflation is set to decline, but the persistent differential with the euro area is likely to remain.
    • Hungary
      Against the background of global financial turbulence, economic activity is set to decline in 2009, before picking up with the recovery in world trade and with higher confidence following international financing support. Inflation should decelerate towards the 3% target as wage growth remains moderate. The current account deficit should narrow.
    • Iceland
      After a long period of unbalanced growth, the Icelandic economy has entered a deep recession following the failure of its major banks. The economy is projected to shrink until early 2010 and unemployment to soar over the next two years. Following a large depreciation of the currency, inflation is projected to spike higher, though to fall back sharply once the exchange rate effects have passed through and the effects of substantial economic slack come to bear. The current account deficit should decline markedly.
    • Ireland
      Activity is contracting as the severe housing market correction has weakened the wider economy, and the weakness will persist well into 2009. Growth will recover in 2010 as the housing construction cycle bottoms out and the financial turmoil wanes.
    • Korea
      Korea has been hard-hit by the global financial crisis and the earlier commodity price shock, which together ended the expansion and pushed up inflation. Sharp won depreciation since mid-September has further clouded the economic outlook. Growth is projected to fall to below 3% in 2009 and then pick up gradually as the world economy improves.
    • Luxembourg
      The international financial crisis is sharply reducing economic growth, initially in the financial sector, but subsequently in broader domestic demand. These effects should persist into 2010. Consequently, unemployment will rise further, while core inflation will fall slowly.
    • Mexico
      Economic growth is set to fall well below potential in 2008 and 2009, before gradually recovering in 2010. The weak US economy and a fall in oil production will cut exports over the next several quarters, while the effects of the financial turmoil will depress domestic demand growth. Activity will recover through 2010 as global economic conditions improve. Inflation will return to near the target rate as commodity prices fall, activity slows and monetary tightening keeps expectations anchored, although the recent sharp depreciation of the peso will put upward pressure on prices.
    • Netherlands
    • New Zealand
      New Zealand has entered recession ahead of other OECD countries, a victim of simultaneous domestic and foreign shocks. The outlook remains subdued because the large macroeconomic imbalances built up over the past decade -- inflation, housing overvaluation, high household debt and a huge current account deficit -- will take some time to unwind.
    • Norway
      After the remarkable performance of the past few years, the Norwegian economy is now slowing toward its potential rate of growth. Domestic demand is moderating as a result of the increased cost of borrowing, falling house prices and declining terms of trade. Nonetheless, inflation remains higher than desirable and rising labour costs are undermining competitiveness.
    • Poland
      The pace of expansion decelerated moderately in the first half of 2008 and recent data point to a further weakening of activity. Amidst the global slowdown, growth is projected to fall below potential, although income tax cuts should support private consumption. With declining oil prices and persisting, albeit abating, demand pressures in labour and product markets, core inflation is expected to subside more gradually than headline inflation.
    • Portugal
      Economic activity moderated in the first half of 2008, as investment and export growth softened. In line with the recent intensification of the financial crisis and expectations of a significant slowing in Portugal’s export markets, activity is expected to contract until the second half of 2009, before recovering slowly in 2010. The unemployment rate is set to increase from its already high level. The sizeable negative output gap and lower food and energy prices will reduce inflation.
    • Slovak Republic
      Although the Slovak Republic will continue to maintain the highest growth rate among OECD countries over the next two years, activity is expected to decelerate significantly in 2009. In particular investment spending and trade growth are likely to be adversely affected by the effects of the financial crisis. Growth is envisaged to return to close to its potential rate towards the end of the projection horizon. Inflation rates should decline from their currently high levels, but to stay above euro area levels.
    • Spain
      GDP is projected to fall in 2009, as residential construction continues to contract, before recovering modestly in 2010. Unemployment will continue to increase substantially. Inflation should recede as a large negative output gap opens up and commodity prices moderate, while falling imports should significantly reduce the current account deficit.
    • Sweden
      The Swedish economy stalled in the first half of 2008 and is expected to weaken in the near term, as the effects of the international financial crisis take their toll. Consumption is projected to pick up late next year as the turmoil subsides and thanks to further income tax cuts and lower interest rates. Export growth should gradually recover as Sweden’s export markets expand again.
    • Switzerland
      Economic activity is expected to contract somewhat in 2009, due to poorer export prospects and a diminished contribution of financial services, followed by a rebound in 2010 as global financial market turbulence abates. Inflation is projected to fall back to 1%, reflecting lower oil prices, the opening of an output gap and wage moderation.
    • Turkey
      The economy slowed in 2008 as weakness in domestic demand was compounded by the international slowdown in the wake of financial market turbulence. Growth is expected to decline to below 2% in 2009 before recovering to 4¼ per cent in 2010, in line with the global recovery.
    • Brazil
      The expansion that gathered pace during 2007 was sustained in the first half of 2008, although activity appears to be slackening owing to a worsening of financial conditions. Domestic demand has been the main driver of growth. The trade surplus is shrinking, essentially due to buoyant demand for imports, and the current account has shifted into deficit. Dynamism in the labour market continued to deliver robust job creation. Inflation picked up considerably through mid-year.
    • China
      GDP growth has fallen, from a peak of nearly 12% to a pace in the high single digits. Export growth is weakening and, with slower capital formation, domestic demand is also projected to ease in 2009, before recovering in 2010. Disinflation is on course to continue, in part due to moderating commodity prices but also reflecting slower output growth.
    • India
      Growth has continued to slacken to under 8% by the second quarter of 2008. Inflation is high, driven by commodity prices, but the peak appears to have passed. The current account deficit has risen substantially and there is downward pressure on the exchange rate. The economy is projected to slow further over the next year and to recover in tandem with the world economy in 2010.
    • Russian Federation
      The fallout from the global financial crisis will sharply reduce real GDP growth in Russia through 2009, with a pick-up expected in 2010. With a reversal in the substantial rise in oil and metal prices, the pattern of terms of trade gains fuelling rapid growth in domestic demand has come to an end. Inflation has risen strongly, but may now have peaked and should decline in 2009-10. Fiscal and current account balances are expected to worsen sharply.
    • Chile
      After several years of robust expansion, activity is projected to moderate and inflation to recede. The slowing world economy, tighter financial conditions and lower investments in mining and energy will all slow growth. Inflation will decline gradually as second-round wage increases from high commodity prices wear off and expectations are re-anchored to the central bank’s target. Past current account surpluses have disappeared as copper prices have retreated from high levels.
    • Estonia
      Real GDP will continue to decline through to the end of 2008, reflecting mostly a sharp drop in domestic demand. Growth is projected to gradually pick up by the end of 2009 and into 2010, driven by stronger exports. Currently high inflationary pressures are expected to weaken in 2009, but the past real exchange rate appreciation will make the desired export driven recovery challenging.
    • Indonesia
      Strong domestic demand continued to underpin growth in the first half of 2008. Investment was particularly robust. Imports are growing faster than exports, but the trade and current accounts are still in healthy surpluses. Inflation rose substantially following a hike in regulated domestic fuel prices in May.
    • Israel
      Global financial turmoil is deepening the slowdown, with the pace of economic activity not expected to pick up substantially before the latter part of 2009. The central bank has already cut its policy rate in reaction to the crisis in financial markets.
    • Slovenia
      Economic activity is likely to slow significantly in 2009, driven in particular by a sharp deceleration in investment in construction. The following year, economic growth should return toward trend as both investment and private consumption recover. Headline inflation is expected to subside due to falling commodity prices, although planned public wage increases will exert upward pressure on core inflation.
    • South Africa
      This year’s economic slowdown is projected to continue, reflecting weaker consumption growth and worsening terms of trade. Real GDP growth is expected to fall to about 3% in 2009 before rebounding to above 4% in 2010, with the FIFA World Cup providing a fillip to activity. Inflation is expected to turn down, returning to the central bank’s target range in 2010, as a result of the monetary tightening over the past two years and falling food and energy prices. Current account deficits will remain large with lower export prices broadly offsetting weaker import volume growth.
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  • Responses to Inflation Shock
    After declining steadily since the early 1980s, domestic inflation picked up again in the early 2000s in most OECD countries and has accelerated significantly over the past year before receding very recently (Chapter 1) These movements can to a large extent be related to import prices and more specifically the commodity components of imports (Figure 4.1). Between 2000 and July 2008, oil prices expressed in US dollars and yen increased fivefold and non-energy commodity prices have more than doubled. Since then, commodity prices (in particular oil prices) have declined but still remain above their level in early 2007. The monetary policy responses to higher inflationary pressures have differed across industrialised economies even using benchmarks that take into account the relative cyclical positions of the major economies. Some central banks have appeared more "hawkish" on inflation, while others, where the acceleration of commodity prices inflation coincided with the beginning of financial turmoil, have appeared more dovish.
  • Statistical Annex
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