Tuesday, May 22, 2012

OECD Report: Part truth, part scaremongering

The OECD’s latest Economic Outlook report, released today, has some great insights on the global growth trend. The report talks about healthy growth trends in the US and Japan, a minor recession in the euro area, and flattish trends in emerging economies. However, it is also full of dire warnings of what might happen to global growth if the euro crisis is not managed properly.

There is no denying that the euro crisis is serious. However, I believe that most of the points made regarding the euro area are scaremongering, though with the noble intention of driving world leaders to take the right kinds of steps.

Here’s what the OECD’s latest Economic Outlook report says: “The global economy is gradually gaining momentum, but the recovery is fragile, extremely uneven across different regions and could be derailed by the crisis in the euro area.”

It further states, “The OECD warns that 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. Avoiding such a scenario requires action to be taken both at country and supranational level.”

However, analysis of global growth numbers to date has a slightly different story to tell:

  • OECD itself expects the US GDP to grow by 2.4% in 2012, up from 1.7% in 2011, Japan to grow by 2% (-0.7% last year), and China by 8.2% (9.2%). These three economies comprise more than half of the world’s GDP, and the OECD growth estimates themselves look pretty healthy.
  • As we go down the list to countries like India, Russia, Brazil, Korea, Canada, Turkey, Taiwan, and Hong Kong, we find that all of them are in various stages of bottoming out or recovery. All these countries together comprise around 70% of the global GDP.
  • The three largest euro area economies—i.e., the UK, Germany, and France—are expected to show a slowdown in growth, but not recession. These together comprise more than 10% of the global GDP.
  • The recessionary economies in the euro area comprise less than 10% of the global GDP, with Greece accounting for less than half a percent.

There is no doubt that the 10% representing recessionary or troubled economies would cause some pain. And if something goes wrong the stock markets very likely would take a nose dive, driven more by paranoia of fear than by anything real. But to extrapolate and imply that these economies would cause a global slowdown or have dire global consequences seems to be taking things just a bit too far.