Global recovery gathers steam but faces negative risks

By Brian Fallow

The global recovery is becoming broader-based and more self-propelled, the OECD says, but the risks are mostly on the negative side.

In its latest Economic Outlook it forecasts world gross domestic product growth of 4.2 per cent this year, rising to 4.6 per cent next year.

World trade is back above its pre-crisis peak and expected to gather pace, from growth of 8.1 per cent this year to 8.6 per cent next year.

"Most risks are on the downside, however, including further increases in oil and other commodity prices which could feed into core inflation, a deeper slowdown in China, an unsettled fiscal situation in the United States and Japan, and renewed weakness in housing markets," OECD chief economist Pier Carlo Padoan said.

The weaker peripheral members of the euro zone are not out of the financial woods yet, either. "A concern is that if downside risks interact, their cumulative impact could weaken the recovery significantly, possibly triggering stagflationary developments in some advanced economies."

The OECD forecasts New Zealand's GDP to grow just 0.6 per cent this year but 4.1 per cent next year as the rebuilding of Christchurch gets under way.

But it notes large uncertainties around those forecasts. "Renewed carry trade may push up the value of the currency, the large external debt position carries risks in a still volatile global financial market, persistently high house prices are vulnerable to correction and reconstruction may experience delays."

It estimates the country's potential (or sustainable non-inflationary) growth rate to be just over 2 per cent a year for the next 15 years, driven more by productivity growth than employment growth.

Among advanced economies generally it worries about high unemployment becoming entrenched especially as governments wrestle with unsustainable levels of public debt. It worries, too, about the risk of a substantial rise in oil prices if the political instability in the Middle East and North Africa spreads.

That would magnify the adverse effects on incomes and demand of the oil price rise which has already occurred, as well as increasing the upward pressure on inflation. Another risk is that the adverse consequences of the disaster in Japan could prove greater or more prolonged than expected.

Yet another is that the tightening under way in China as it confronts inflationary pressures will lead to a harder landing than the easing to 9 per cent growth in the OECD's central forecasts.

- NZ Herald

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