OECD joins the growth lobby; calls for structural reform in CEE

By bne IntelliNews May 23, 2012

Tim Gosling in Prague -

Pitching the Eurozone crisis as the biggest single threat to the global economy, the OECD joined the growing ranks calling for austerity to share a little of the spotlight with growth in its latest economic outlook. However, in CEE, with growth mostly holding up better than other parts of Europe, the organisation is more concerned to see strategic reform.

"The crisis in the Eurozone remains the single biggest downside risk facing the global outlook," said OECD chief economist Pier Carlo Padoan in presenting the updated economic outlook on May 22. In its last outlook released in November, the organisation warned of a "deep recession with large negative effects for the global economy" if the Eurozone does not tackle the crisis.

Predicting the Eurozone will contract 0.1% in 2012, followed by growth of 0.9% next year, in its May report, the OECD suggests: "The immediate dangers of such developments have receded somewhat since last autumn, although... the dangers have not disappeared. Failure to act today could lead to a worsening of the European crisis and spillovers beyond the euro area, with serious consequences for the global economy." It notes however, that it predicts expansion of 2.4% for the US economy this year, followed by 2.6% in 2013.

The report comes on the eve of an EU summit on May 23, which is anticipated to see new French President Francois Hollande pitch for his growth strategies to join the austerity programme which has been propelled by his predecessor alongside German Chancellor Angela Merkel. "Fiscal consolidation and structural measures," the report said, "must proceed hand in hand, to make the adjustment process as growth-friendly as possible."

In CEE, the OECD appears less concerned about austerity - perhaps reflecting much of the region's superior growth outlook compared to core Europe, but also the paucity of room and levers that most of the countries have to stimulate their economies - and tends to stick to calls for long term structural reforms. In particular, it worries that reform is needed to raise employment, which in turn would help stimulate domestic demand levels, which remain suppressed in most countries.

In the Czech Republic, the report forecasts real GDP will fall 0.5% in 2012 owing to a decline in domestic consumption spurred by fiscal consolidation, although growth is projected to return in 2013 - 1.7% - due to stronger exports and investment.

Still, the OECD appears happy that fiscal consolidation should continue at a reasonable pace, despite suggestions that the Czechs are one of the few in CEE in any sort of position to be able to slow austerity measures and offer more stimulus. However, continued austerity should pay off, the report suggests, allowing the Czech deficit to come in well under the Maastricht limit this year at 2.5%. The report also calls for further structural reform to deregulate product markets, in a bid to "support investment growth and job creation".

Estonia's strong export-led growth in 2011 is projected to weaken substantially in 2012, falling to 2.2% from the 7.6% seen last year, due to "the weak external environment, notably euro area tensions". As world trade growth improves, the report suggests, activity is projected to pick up again in 2013 to record growth at 3.6%. Meanwhile, disinflation is likely to be interrupted temporarily by oil price increases and electricity market liberalisation.

In terms of recommendations, the OECD says Estonia should "introduce a fiscal rule consistent with medium-term objectives but allowing automatic stabilisers to operate. Spending increases on policies to activate long-term unemployed should be continued to spur further employment gains."

Thanks to its high dependence on exports, a contraction of 1.5% in GDP is anticipated for the Hungarian economy by the OECD for this year, before improved domestic demand returns it to growth of 1.1% in 2013. The authors worry that already high inflation will be provoked by a weak currency, rising oil prices and hikes in indirect taxes to finish the year at 5.7%, although the effects should moderate gradually to reduce the CPI gain to 3.6% in 2013.

"Following a major cumulative increase in the structural deficit in 2010 and 2011, fiscal consolidation has resumed with a view to restoring sound public finances and exiting from the EU excessive deficit procedure, the report notes, pitching the country's deficit at 3%. However, it notes that this budget adjustment will weigh on activity in 2012 and 2013.

The recent warning signs of a slowdown in the Polish economy are noted by the OECD, and although the country is still expected to record a relatively robust 2.9% growth in 2012, like other analysts, the report expects Poland to be one of the few European economies to fail to improve its growth rate the following year, "as a result of softer external demand, uncertainty related to the euro area crisis, ongoing fiscal consolidation, the marked deceleration of public investment in the aftermath of the 2012 football championships, and the levelling off of EU funds in 2013."

Warsaw is set to just duck under EU deficit limit in 2012, with the fiscal hole reduced to 2.9%, "but it will need to make additional efforts to reach its deficit target of 2.2% of GDP for 2013," the report concludes.

Slovakia is another forecast to turn in a relatively star performance in 2012, with GDP growth - driven mainly by exports and investment - now projected by the OECD to grow by 2.6% in 2012, and 3% in 2013 as world trade recovers.

However, the old bugbear persists, and continued high unemployment, "as firms try to increase productivity growth to regain competitiveness," combined with fiscal consolidation, suggests the country's depressed domestic demand is unlikely to improve any time soon. "Deep structural reforms are necessary," the report says, "to reverse the emerging duality in the economy between the highly productive, capital intensive export sector and the domestic sector, which is not innovative enough."

"The new government is rightly committed to reduce the fiscal deficit to below 3% of GDP by 2013," the report points out, but the Slovaks are set to miss EU limits by some distance this year, with the deficit pitched at 4.6%, the analysts say. Still, they also call for fiscal consolidation to be "carefully designed, so as to preserve the growth potential of the economy."

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