Growth is on the up as interest rates stay low

This is the time of year when the key global institutions (the OECD, IMF and World Bank) review their forecasts for the year in view of how economic events have developed since they last published reports in the Spring.

The Paris based OECD has been especially busy this month with updates on their Spring assessment for global growth as well as some newly published views on the state of several major economies including the US.  No time to lose after ‘la rentree’.  Both reports make pretty good reading at a time when many headlines are still discussing the likelihood of a double dip in growth. 

Their autumn global update (to be found at: www.oecd.org ) admits to a slower level growth for the second half of the year but with longer term improvements on the cards and a reducing risk of a return to a downturn. 
Their assessment of the US (published yesterday at www.oecd.org - USA) is pretty upbeat about the situation.  They see the economy having started to grow since the start of the year with a projected increase of 2.6% by year end rising to 3.5% in 2011.  These figures for 2010 are confirmed by the latest official data from the US Office for Statistics which go as far as declaring the end of the recession i.e. they have now entered the upside of the cycle. 

The OECD also identifies some quite distinct and new ‘post crisis’ issues.    The growth that is coming back into the economy – or at least the West - is of a kind that will not improve employment as much as it has done in the past.  So, a period of jobless growth.  They also suggest that the fiscal position of he US does allow them to be one of those nations that can use some degree of fiscal stimulus to urge and sustain that growth in the short term.  They stress though that any public spending will have to be focussed on maximising the bang for the buck: emphasis on increasing public sector efficiencies and labour market policies such as re-training as well as infra-structure spending are areas where they say public spending can have a legitimate role in a modern economy.  Even if the US can afford some delay in putting their fiscal position into a more sustainable order, the OECD urges the need for a clear long term plan to maintain international market confidence: especially in relation to health and pension budgets.

The message from the latest IMF review produced at the star of the month took a similar line of budget deficits (see www.imf.org).  They point out that the stimulus packages of the last two years have only contributed some 10% to the overall deficits forecast over the next 5 years.  The rest were essentially accumulated during the previous two decades.  It means that the main focus for fiscal policy over the coming years really is about bringing us into a more sustainable position and getting used to new fiscal rules and behaviours.

The main affects of these comments are that most developed nations - and certainly the EU and UK - in the next year or more will use monetary measures rather than significant fiscal measures should the economic recovery look threatened.  With a solid but moderate rebound being forecast, this suggests that interest rates will stay low for the next year and we may see more central bank intervention used as the main tool to boost liquidity.