Sub-par economic performances by several emerging markets will likely be a restraint on the global economy in the near term, the OECD says.
In an update of its November economic outlook, the Organisation for Economic Cooperation and Development says major advanced economies are continuing to strengthen, helped by low interest rates and reduced drag from their budgets.
However, it said in an Interim Economic Assessment released in Paris today that for major emerging market economies (EMEs) it is more of a mixed picture, with some experiencing a marked loss of momentum.
“Given that emerging economies now account for over half the world economy, continued sub-par economic performance for several of the major EMEs is likely to mean that global growth remains only moderate in the near term,” the OECD said.
The decision last December by US Federal Reserve to begin winding back its asset-buying stimulus program, otherwise know as tapering, forced a number of emerging market central banks to lift interest rates to stem capital outflows.
The OECD believes this gradual scaling down of stimulus by the US Fed was the right decision with the recovery in the world’s largest economy relatively well established.
But it also highlighted the vulnerabilities of some emerging economies to swings in capital flows and currency pressures.
“In a few cases it may be possible to ease fiscal policy to offset the contractionary effect of tighter monetary policy, but some EMEs are constrained by the need to reduce budget deficits,” it said.
As for Australia’s number one trading partner, China, the OECD says growth is around trend and inflation is well contained.
However, it believes China needs to restrain credit growth to help address the growing vulnerability of its financial system.
More broadly, the OECD said some long-standing risks remain for the outlook.
“Japan is only just beginning to confront its daunting fiscal challenges, fragilities in the euro area are still acute, and the possibility persists of a sharp slowdown in China driven by balance sheet effects,” it says.
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