OECD economic outlook and policies: overview - Organization for Economic Cooperation and Development - includes related articles

OECD Economic Outlook, June, 1993

The current downturn in OECD activity has now lasted three years and a solid recovery is still some way off. The United States, Canada and some other countries are already well into a recovery. Growth has been modest in these countries, however, as firms and households have continued to reduce unsustainable levels of debt. Japan appears to be at or close to a turning point. But the trough does not appear to have been reached yet in continental Europe where confidence is weak and interest rates have only begun to fall. The short-term outlook is for a gradual recovery in OECD activity to get underway in 1994, supported by further monetary easing in continental Europe and by both monetary and fiscal stimuli in Japan. Nevertheless, OECD unemployment may continue rising into 1994. One positive feature of the outlook is that the OECD area on average should be closer to price stability over the projection period than at any time in the past three decades. World trade, which has continued to be a dynamic element throughout this downturn, is projected to accelerate next year. Differences across the major countries and zones in their relative cyclical positions are likely to lead to a further small widening in the absolute levels of current-account imbalances, damped somewhat by changes in competitiveness related to recent exchange-rate changes. The risks around the projection for activity appear to be mostly on the downside, notably attaching to the speed with which lower interest rates may spark off European recovery; there is an upside risk on inflation in those countries where economic slack is reduced over the projection period and in countries which have experienced major currency depreciations.

FORCES AFFECTING RECENT DEVELOPMENTS

OECD output continued to grow slowly, at an annual rate of around 1 per cent, during the second half of 1992 and into the first half of 1993. In consequence, OECD unemployment rose further to over 34 millions (an unemployment rate of almost 8 1/2 per cent).

There are important differences in cyclical positions across OECD countries. In most of the countries which entered first into the current slowdown, such as the United States, the United Kingdom, Canada, Australia, New Zealand and Norway, a slow, and in some cases erratic, recovery is now underway. In contrast, in Japan the first signs that the economy may have stopped slowing have only just appeared. Most continental European countries went into the downturn later and are showing few signs of emerging from it quickly.

Against this background of weak activity and high and rising unemployment, the process of OECD-wide disinflation which began in 1990 has continued. One notable feature is that manufacturing producer prices in most countries are close to stability, and have even fallen in Japan, France, Austria, Belgium, Denmark and the Netherlands -- countries which have recently experienced appreciations of their effective exchange rates. Prices of services and rents, on the other hand, have shown less deceleration to date.(1)

As highlighted in last December's Economic Outlook, price movements in financial and property markets, and the responses to them by economic agents, have been one of the chief influences on the evolving conjuncture. Recent developments in these markets and in consumer and business sentiment are discussed in the following sections.

Debt problems and monetary conditions

The process of unwinding unsustainable debt positions built up during the asset-market booms of the second half of the 1980s has led households and firms in many countries, notably the United States, Japan, the United Kingdom, Canada, Australia and some Nordic countries, to retrench their spending. In many countries, banks have been faced with a need to restore profitability and reserves in the wake of large losses, deteriorating asset quality and new internationally-agreed capital-adequacy requirements. This has prompted them to increase lending margins and to adopt a more cautious stance in respect of demands for credit.

These financial pressures on banks have been reflected in a downgrading of their credit ratings in a number of countries. Using average ratings of long-term debt of large banks as an indicator, Figure 2 illustrates the unfolding of the restructuring process during the current downturn. In the United States, credit ratings suggest that the financial position of major banks has begun to improve over the past two years, while in several other countries credit ratings continued to be downgraded during 1992 and into 1993.

Since the autumn of 1992, short-term interest rates have remained low in the United States and fallen slightly in Japan to a historic low. Lower short rates directly ease firms' and households' debt-servicing obligations and facilitate the process of reducing indebtedness to more sustainable levels. The U.S. private sector, particularly the corporate sector, has made major strides in cutting its debt and lowering its debt-servicing burden sharply, but this process has not proceeded as far in other countries.