The US and Japan “have yet to produce credible medium-term plans” to stabilize their debt, while other countries need to provide more clarity on how their fiscal consolidation targets will be met, according to the Organisation for Economic Cooperation and Development’s 2011 Economic Outlook, which says that risks to the global recovery remain significant.
The Federal Reserve should consider raising interest rates, while the European Central Bank should hold off on further tightening, the report advised.
A two-speed recovery where emerging markets outpace developed markets is causing capital to flow into non-OECD economies and this is creating inflationary pressures and prompting policy restraint which threatens to endanger the global recovery, the OECD said.
"A key message of this economic outlook is that there is no room for complacency. The crisis is not over yet. It has just changed its skin," OECD secretary general Angel Gurria said on Wednesday.
Significant downside risks overshadow the possibility of a private-sector led recovery, the report warned. These include rising oil prices; a further slowdown in China; continued fiscal instability in the US and Japan; and fresh weakness in housing markets. A combination of these factors could lead to stagflation in advanced economies and derail the recovery, Pier Carlo Padoan, the OECD’s chief economist wrote in his editorial accompanying the outlook.
“All this suggests that the global crisis may not be over yet,” Padoan wrote. “Policy makers must intensify efforts to deal with medium-term challenges.”
Unemployment remains high, and is a challenge for the long term, the report said.
Further growth is required if fiscal consolidation in indebted countries is to be achieved, the organization said. The current imbalance between interest rates and growth is likely to continue for several years, meaning that further structural reforms will be needed in developed economies, Padoan wrote.
Despite the risks, the recovery from the recession is becoming more broad-based, the report noted. Supply-side shocks from the commodity price spike and the tsunami in Japan have dampened activity in the short term and pushed up inflation, but their effects should fade out by the end of 2011, it said.
Global output will grow 4.5 percent in 2011, and the same in 2012, according to OECD forecasts.