World economy recovers from slump

ED RICHARDSON WITH THE slump of business investment now well over, the world economy is experiencing a strong and sustainable recovery, says Jean-Philipe Cotis, chief economist at the Organisation for Economic Co-operation and Development (OECD). Cotis told a media conference in Paris recently: “Asia remains buoyant, with China close to overheating and Japan enjoying a much stronger and broader recovery than expected. In the United States, the economy has already been growing well above potential and other English-speaking countries, which took part only marginally in the past slowdown, are cruising ahead.” However, the recovery is still, to a large extent, bypassing Continental Europe, where domestic demand and household expenditure remain surprisingly weak. Core Continental European countries are still struggling to revive their economies, with Germany and Italy facing the most difficult challenges. Looking further ahead, there are good reasons to expect a more evenly shared recovery. The world recovery has achieved enough of a momentum to start pulling European economies out of their domestic anaemia, provided a modicum of exchange-rate stability prevails in the months to come. Conversely, growth in the United States and China should moderate somewhat as monetary stimulus is progressively withdrawn by central banks. The partial narrowing of growth differentials across OECD regions would not be sufficient, however, for the existing current account imbalances to unwind. The return to stronger job creation in the United States and the OECD at large should help contain pressures for more protectionist measures, thus providing a more favourable background for the advancement of the Doha round. While becoming broader-based, the world recovery should also benefit from continued price stability. Despite recent increases in oil and commodity prices, inflationary pressures should remain relatively subdued over the next few quarters, against the background of the substantial economic slack that remains in many OECD regions.