World economic outlook grim – Canada not so bad: think-tank

Hopes for a global economic recovery appear muted after economists at a Paris-based think-tank predicted a half a percentage point dip in growth this year due to sagging emerging markets, the European Union’s ongoing financial woes and worry about how the U.S. will wean itself off stimulus.

The Organization for Economic Co-operation and Development revised it’s predictions of global growth by saying the economy will only expand 2.7 per cent this year, not 3.1 per cent as first thought. But by 2014, growth should hit 3.6 per cent and by 2015, 3.9 per cent.

The recovery is real, but slower, and there may be turbulence ahead, Angel Gurría, OECD secretary-general, said during the release of the Economic Outlook in Paris on Tuesday.

“Reforms to boost productivity, rebalance the global economy, and reduce structural impediments to job creation remain essential. Decisive government action is also needed to address the social legacy of the crisis. It is not just the recovery that is at risk, but the very fabric of our societies,” he said in his address.

Not everyone agreed with the OECD global outlook. Jack Ablin, chief investment officer at BMO Private Bank - a part of the BMO Financial Group, said he was a bit surprised by the OECD forecast. “Based on the readings that I see, it would appear that the tailwind of the recovery is increasing,” Ablin said.

Ablin expects the European continent to experience growth. “Obviously there are fits and starts at the country level – Italy is still plagued with a three-year recession, Greece is still battling its demons – in fact both in Greece and France we are seeing radical right-wing parties taking on more positions of authority. This is now the third or fourth year of belt-tightening and we are starting to see the social fabric tear in certain countries,” he said from Chicago.

The OECD, which represents the world’s largest economies, had quiet praise for Canada in its economic forecast summary. The OECD predicts overall growth for Canada to be 1.7 per cent in 2013 and 2.3 per cent in 2014. The economic growth rate for 2015 is expected to be 2.6 per cent.

Canada has weathered the global economic crisis well due to solid macroeconomic policy and the strength of the banking sector. And while mining and oil profits help bolster the economy somewhat, the OECD continues to caution against record low mortgage rates and burgeoning household indebtedness.

To keep everything under control, the OECD suggests the Bank of Canada, which sets the prime lending rate, should boost its rates to suppress any looming inflationary pressures.

While the OECD wants rates increased by 2014, the general consensus is that the Bank of Canada won’t move rates up before 2015, said Benjamin Reitzes, a senior economist with the BMO.

Inflation fears seem to be behind the OECD recommended rate hike – but at this point, there is no inflation pressure in Canada, said Reitzes. “Until the economy materially picks up it is unlikely we’ll see significant pressure from the inflation side, at least enough to push rates higher,” he said.

Also on Tuesday, European Commission President José Manuel Barroso proudly announced the European Parliament has given its final blessing to the $1.3 trillion (U.S.) budget (960 billion euros) from 2014 to 2020.

After 2 years of negotiations, the budget has shrunk from 975 billion euros to 960 billion euros. The decrease, the first of its kind for the EU, was sought by European nations that have dealt with painful austerity policies which have caused serious social unrest from violent protests to high unemployment.

Barroso called it a “great day for Europe.” 

“Our modern, future oriented budget can make a real difference to people’s lives. It will help strengthen and sustain the recovery underway across the EU … we can build our way out of the crisis,” he said via a video statement.

“Financial support for those below the poverty line or those looking for a job, investment opportunities for small companies and assistance for local communities, farmers, researchers and students. This is a deal that helps every family across Europe.”

He then added the EU budget is modest in size compared to national wealth but one single year’s budget represents more money, in today’s prices, than the entire Marshall Plan, the U.S.-led initiative that bankrolled the rebuilding of Europe after the Second World War.

“It is therefore our most important lever to invest in sustainable growth, jobs and competitiveness, in the safety and security of our citizens and the solidarity with the poorest in Europe and the wider world,” he said.