This statement concerns item 2 (The Global Economy and Financial Markets—Outlook, Risks, and Policy Responses) of the provisional agenda of the International Monetary and Financial Committee meeting.

OECD Assessment of the World Economy
Submitted under item 2 of the Provisional Agenda

The OECD is finalising its Economic Outlook No.73, which will be released on 24 April 2003. Our views at this time are summarised below.

The global economy has been hit by a number of adverse developments since the last IMFC meeting. Oil prices have been volatile, financial markets have retreated, war has broken out in Iraq and the SARS virus has spread world-wide. Uncertainty has become more prevalent. These developments have depressed consumer and business confidence and contributed to weaken economic activity. As a result, growth prospects will be less favourable than expected in the short run.

The OECD projects a delayed recovery, starting later this year and gathering momentum in 2004. The progressive dissipation of geopolitical uncertainty and the ongoing drop in oil prices will support domestic demand. Polices are generally supportive. Business investment could however be held back by balance sheet and corporate governance weaknesses. As these issues are gradually resolved, investment should regain strength and help the upswing. Overall, OECD real GDP is projected to grow by 1.9 per cent in 2003 and 3.0 per cent in 2004. By next year, output gaps will however remain sizeable in nearly all OECD countries.

Given weak activity, inflation should remain subdued. Hence, in most countries, inflation will not limit the scope for supportive monetary policy. In the United States, the central bank has already taken advantage of the low inflation environment to ease its policy. Further easing remains possible, although interest rates would then approach the zero nominal floor. In the euro area, core inflation has fallen below 2 per cent in recent months. Lower short-term interest rates would make an important contribution to the euro area recovery.

Fiscal balances have deteriorated sharply in the last two years. Automatic stabilisers, discretionary stimulus and other factors (such as the evaporation of capital gains) have resulted in sizeable deficits. OECD-wide government budgets, which were balanced two years ago, are projected to record deficits of about 3½ per cent of GDP this year. In the context of ageing population, this striking turnaround is a cause for concern. There is now a pressing need to put public budgets on a medium-term consolidation course.

More than ever, economic reforms are key to growth. While slow activity does not help to garner popular support for reform, a decisive and credible push towards pro-growth policies may actually improve confidence. After several years of weak and uneven growth, it is time for many OECD countries to renew their commitment to economic reform. Setting an agenda for growth and seeing to its effective implementation will be at the core of the next OECD Ministerial Council meeting on 29-30 April 2003.