OECD: A US-Based Global Recovery?

Anyone who has watched the US economy falter would suppose that American GDP growth will be a drag on the global economic recovery. The OECD sees the situation otherwise, although facts undermine the conclusions of its new Economic Outlook.

The organization expects global GDP to rise 4.2% this year and 4.6% next. The EU region, as would be expected, will barely grow at all. The OECD nations as a whole, which are the world’s developed nations, will post GDP growth of 2.3% this year and 2.8% next.  US GDP will move up 2.6% this year and 3.1% next. The American economy would need to speed its recovery from Q2 rates if it is going to reach OECD projections.

Ironically, one of the risks to the worldwide recovery is “a stronger-than-projected slowdown in China.” There are concerns that money tightening in China will undermine GDP improvements. But, the OECD seems to contradict itself. As long as China is the primary provider of finished goods to the world, the projected growth in the US economy should fire demand for exports from the People’s Republic. Commodities prices could damage Chinese expansion, but the country still subsidizes many energy costs for businesses and individuals. Chinese inflation is buffered through that process. The People’s Republic seems ready to keep the process up. There is news of a revolt by China electric utilities which have to pay higher coal prices which hurts their margins. The central government appears to be ready to allow those utilities to lose money so long as they supply enough electricity to the expanding economy.

Every forecast of global expansion comes with a caveat. These days, it is always the same. Commodity prices increases are the primary challenge to ongoing expansion. It is a wonder the OECD does not believe GDP worldwide will be flat. The UN says food prices are near historic highs. Crude, which showed a brief sign of dropping, is back above $110. Goldman Sachs and Morgan Stanley put year end price targets on oil of $120 and $130, respectively.

Forecast are only as good as the caveats that accompany them. For the OECD these caveats involve China to some extent and inflation primarily. That means after the hedges, the OECD is not really optimistic about global GDP growth this year and next, at all.

Douglas A. McIntyre