INSIGHT: OECD calls for bold action to deal with debt crisis

31 October 2011 16:55  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--Leadership is expected from the G20 heads of government meeting in Cannes in the South of France this week.

The situation confronting the world's major economies is similar to that faced in the fourth quarter of 2008. Markets are troubled and need direction.

According to the OECD on Monday: “Strong, credible medium-term frameworks for fiscal consolidation and durable growth are needed to restore confidence in the longer-term sustainability of the public finances and to build budgetary space to deal with short-term economic weakness”.

Attention will be focused firmly on the ‘action plan’ devised by eurozone politicians on 26 October, which seeks to underpin support for the Greek economy and the creditworthiness of other, much larger nations.

Their agreement requires implementation and if that is not achieved in a credible way - “promptly and forcefully” are the words used by the OECD - then the economic outlook is gloomy indeed.

If EU leaders fail to inspire confidence and if fiscal policy in the US turns out to be excessively tight, financial conditions could deteriorate to a degree similar to that seen between the second half of 2007 and the first quarter of 2009, the OECD suggests.

In such circumstances, GDP in some of the major OECD economies could shrink by as much as 5% by the first half of 2013.

And if nothing is done, uncertainty will dominate the world’s economies in the way it has for the past few months.

The OECD's revised GDP growth projections are, for the G20 nations, 3.9% this year, 3.8% in 2012 and 4.6% in 2013. “This average masks a wide divergence among country groupings,” it says. “Emerging-market economies are much more buoyant, despite some softening.”

Chemical companies have struggled with soft markets and lower volume growth in the third quarter. And they are cautious in their fourth-quarter outlook.

Producer and consumer inventories are low but the gap between supply and demand has widened, putting downward pressure on prices. Up and down supply chain firms struggle to find confidence in markets running up to the year end.

Polyethylene (PE) demand in Europe, for instance, is weak and the near-term outlook is not good. Producers are asking whether further production cutbacks are needed because supply still outstrips demand.

The message from the OECD clearly is that GDP growth in the G20 will remain weak in the near term and that some of the eurozone economies are likely to contract for a while.

Its analysis suggests that inflation will weaken but that deflation is not an immediate risk outside Japan. But it warns that labour markets will weaken further and that there is a risk that “cyclical unemployment” will become entrenched with some workers being forced into inactivity.

The International Labour Organization (ILO) warned on Monday that the next few months will be critical for avoiding further unemployment “and a further significant aggravation of social unrest”. It will take about six months for the current global slowdown to have an impact on labour markets based on past experience, it said.

“In 2008, G20 leaders rose to the challenge with a clear and coherent plan and we avoided a second Great Depression,” the OECD says. “Today, the adoption and implementation of the action plan is just as imperative to restore confidence through decisive actions in specific countries and regions.”

OECD projections for the G20


2010

2011

2012

2013

Real GDP growth

5.2

3.9

3.8

4.6

Advanced G20

2.9

1.5

1.5

2.2

US

3.0

1.7

1.8

2.5

Euro area

1.7

1.6

0.3

1.5

Japan

4.0

-0.5

2.1

1.5

Emerging-market G20

8.5

7.2

6.7

7.4

China

10.4

9.3

8.6

9.5

The G20 member nations are: Argentina, Australia, Brazil, Canada, China, EU, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, Republic of Korea, Turkey, UK, US

Read Paul Hodges' Chemicals & the Economy blog for ICIS
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By: Nigel Davis
+44 20 8652 3214



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