Greek crisis risks positive OECD outlook

The latest economic outlook from the OECD, published last month, forecasts that global growth will pick up in 2015 and 2016 writes Oliver Mangan Chief Economist at AIB.

It points out, though, that growth will remain modest enough relative to previous cycles and also highlights a number of risks to its forecast, including the ongoing Greek debt crisis.

The OECD notes that the year got off to an inauspicious start with the first quarter seeing the weakest global growth since the end of the financial crisis.

However, this weakness was largely due to temporary factors and the global economy is regaining its momentum again, most notably in the US and the UK.

Tailwinds from lower oil prices and the effects of further monetary easing should see an improvement in growth in most economies this year. The OECD expects to see a boost to consumption from lower energy costs in oil-importing countries.

Furthermore, it estimates that more than half of the world economy has experienced monetary policy easing this year. Meanwhile, fiscal policy is turning less restrictive in most advanced economies.

The latest data are encouraging, with signs of a pick-up in activity in the US and UK in recent months after a slowdown in growth in quarter one.

Meanwhile, growth in the eurozone and Japan appears to have moved onto a more solid footing this year. The rate of growth in China also looks to be close to stabilising at more moderate levels after slowing in recent years.

Thus, despite the weak start to the year, the OECD expects GDP to increase 1.9% in advanced economies in 2015, slightly ahead of the 1.8% rate recorded last year, and well above the sub-1.5% rates seen in 2012/13.

It forecast that growth in the OECD area will accelerate to 2.5% in 2016, helped by a pick-up in investment activity, which has been very subdued to date in this upturn.

Hopefully, one-off factors which hit growth earlier in the year do not recur either.

The OECD expects stronger growth in the eurozone, which should benefit from the sharp weakening of the euro. Furthermore, there has been a marked easing of monetary conditions in the eurozone over the past year, culminating in the decision by the ECB to start a full-blown quantitative easing asset purchase programme in early 2015.

After a prolonged period of weakness, GDP growth in the eurozone picked up to 0.4% in the final quarter of last year and opening quarter of 2015.

Recent leading indicators suggest that the strengthening in activity is being sustained.

The OECD is forecasting that growth in eurozone GDP will average 1.4% in 2015 and reach 2.1% next year, up from 0.9% in 2014 and –0.3% in 2013.

In the US, economic activity was held back in the opening months of the year by unusually severe winter weather and port strikes. The economy, though, has regained momentum in the second quarter.

Nonetheless, as happened last year, growth for 2015 as a whole will be held back by a weak opening quarter, as well as the stronger dollar and lower investment in energy. However, the OECD sees US growth picking up to 2.8% in 2016 from 2% in 2015.

The UK economy also slowed in the opening quarter of 2015, with GDP rising by just 0.4%. However, growth is likely to have picked up again in the second quarter.

Meanwhile, last week saw GDP growth for the UK in 2014 revised up to a robust 3%. It had been initially estimated at 2.6%.

An improving labour market, pick-up in the eurozone economy, subdued inflation and rising real wages all suggest that the UK recovery will be sustained. However, fiscal tightening and the strength of sterling will continue to act as headwinds.

Overall, UK GDP should grow at a healthy rate of around 2.5% in 2015 and 2016.