>A strengthening recovery, but also new risks

Growth is picking up in the OECD area – at different speeds across regions – and at a faster pace than expected in the previous Economic Outlook. Strong growth in emerging-market economies is contributing significantly. However, risks to the global recovery could be higher now, given the speed and magnitude of capital inflows in emerging-market economies and instability in sovereign debt markets.

Keeping markets open has been a strong positive factor in the upturn. The rebound in trade, while incomplete, has been substantial and is proving to be a major force pulling the global economy out of recession. The ongoing recovery in activity could surprise on the upside, with a policy-driven expansion giving way to self-sustained growth. Fixed investment could bounce back more robustly and household consumption could recover more rapidly with household savings rates having risen more slowly than previously anticipated, especially in Europe. The spillover from growth in non-OECD Asia could be stronger than expected, especially in the United States and Japan. From this point of view, the overall economic environment is relatively auspicious.

As activity gathers momentum, global imbalances are beginning to widen again. However, in some emerging-market economies, notably China, strong domestic, policy-driven demand is keeping a large external surplus from rising to the levels seen prior to the crisis. This does not obviate the need to tackle global imbalances through appropriate policies. As discussed in this Economic Outlook, strong, sustainable and more balanced growth can be achieved through a combination of macroeconomic, exchange-rate and structural policies, while delivering fiscal consolidation. Identifying and implementing such a combination of policies is a major goal of international collaboration, most notably within the G20.

Progress in financial market reform will also require international collaboration. Internationally agreed rules and regulations will need to be established to strengthen the stability of the global financial system. Articulating more clearly the roles of monetary and prudential policies in dealing with future credit and asset-price developments is also a priority.

While activity is picking up, employment growth is still lagging. Over the two years through the first quarter of 2010, the ranks of the unemployed rose by over 16 million in the OECD area as a whole, employment fell by 2¼ per cent and many more workers were working shorter hours than before the crisis. But the surge in unemployment, while dramatic and notwithstanding the attendant human and social costs, has been smaller than initially anticipated. The OECD-wide unemployment rate may now have peaked at just over 8½ per cent. At the same time, the pick-up in activity, notably in Japan and in some European economies, will likely be met by increasing average hours worked per employed person and hourly labour productivity, rather than significant net job creation. Thus, prospects for strong employment growth in these countries appear weak. By contrast, firms in the United States have shed large numbers of employees during the downturn and may therefore have to rehire relatively strongly in the upturn.

Appropriate labour market and social policies can do much to promote a jobs-rich recovery. Social protection systems have played an important role as automatic stabilisers to cushion the impact of the recession on employment. Significant additional resources have been allocated to labour market and social programmes in the stimulus packages put in place during the downturn. As the recovery takes hold and countries face the challenge of fiscal consolidation, it is important to continue to make room in budgets for cost-effective labour market programmes that support those workers at greatest risk of becoming long-term unemployed and losing attachment to the labour market. Policies that promote reductions in unemployment through cuts in the effective labour supply, such as early retirement schemes or easing eligibility criteria for disability benefits, would exacerbate labour market imbalances and weaken long-term fiscal positions.

To read the full report: RECOVERY AND RISKS