Unemployment and Inflation Pose Risk to Global Economic Recovery

Posted on : Thu, 02 June 2011

The global economy is staging a recovery from the recession in 2009, but some risks persist, according to a QNB Capital analysis of the latest Organisation for Economic Co-operation and Development (OECD) forecasts.

The OECD, a grouping of 34 mainly advanced countries, released its latest twice-yearly economic outlook at the end of May 2011. The report forecasts a global real GDP growth of 4.2% in 2011 and 4.6% in 2012.

The overall picture demonstrates greater confidence in the global economic recovery, particularly in the private sector. However, the OECD expects considerable variation between developed and emerging economies. The OECD only expects growth among its members of 2.3% in 2011 and 2.8% in 2012, compared with an average of 7% for emerging economies during the two years.

There are two main risks to the recovery: unemployment, particularly in OECD countries, and inflation, particularly in emerging economies.

The OECD report highlighted the issue of persistent high unemployment in a number of economies. Unemployment within the OECD has risen from 5.7% in 2007 to 8.3% in 2010. In 12 OECD countries, unemployment increased by more than two percentage points over this period.

Some countries were particularly hard hit. In Ireland, unemployment rose from 4.6% in 2007 to an estimated 14.7% in 2011. In the US, it rose from 4.6% in 2007 to 9.6% in 2010. The OECD expects overall unemployment within its member countries to fall from 8.3% in 2010 to a still high 7.4% in 2012.

However, an increasing proportion of the unemployed have been out of work for more than a year, posing the risk that unemployment could become entrenched. The proportion of long-term unemployed to the total number of unemployed has been rising in a number of countries, most dramatically in Spain (around 8% in the third quarter of 2010), Ireland (7%) and the US (3%).

The rising proportion of long-term unemployment could lead to deterioration in human capital. It also has the potential to create an economic burden through the permanent withdrawal of large numbers of unemployed from the labour market, says QNB Capital.

Inflation could also undermine the recovery. Rising oil and commodity prices combined with loose monetary policies are leading to higher inflation worldwide.

In non-OECD countries, inflationary pressures are being intensified by strong domestic demand, supply shocks (such as the fall in Japanese exports after the earthquake), and high capital inflows (such as those experienced in 2011 by Brazil where foreign capital is leading to higher inflation). Concerns about rising inflation could prompt governments to increase interest rates, which would act as a break on growth owing to the higher cost of borrowing.

However, this could stimulate even greater inflows of capital, attracted by the higher deposit interest rates. The OECD stated that capital inflows are partly responsible for higher inflation. Therefore, interest-rate hikes may be counterproductive as high real interest rates would incentivize capital inflows.

The OECD highlighted some other downside risks to the global recovery. These included more increases in oil and commodity prices, which would drive inflation higher. Other risks are a slowdown in China and renewed weakness in housing markets. Sovereign debt problems in the eurozone and high budget deficits in the US and Japan, which were 10.6% and 8.1% of GDP respectively in 2010, were also highlighted as areas of concern.