WASHINGTON – A top international economic group, representing the world’s leading industrial nations, calls the world economic recovery “fragile.” And it says the recovery – which other analysts say millions of workers worldwide have yet to see – could reverse into a new recession due to misguided, wrong economic policies.
The May 22 report by the Organization for Economic Cooperation and Development adds the U.S. is at risk of that U-turn, in so many words.
Five years after the collapse of the U.S. subprime mortgage market “sparked off the most dramatic financial and economic crisis in several decades…we cannot yet say the crisis is behind us. More than once, signs of recovery have disappointed,” said Pier Carlo Padoan, OECD’s chief economist.
“Policy mistakes have been made, sometimes reflecting inaccurate reading of events, at other times reflecting policy and political failures. Is it different this time? As long as confidence is not rebuilt on a solid basis with the right policy choices, downside risks will prevail.”
OECD forecasts the U.S. jobless rate will keep slowly declining, to 7.9 percent by the fourth quarter of this year. It says Europe is in a tailspin, with joblessness above 10 percent there, and that its problems could drag the rest of the world down. But the U.S. also could hit the skids, OECD says, if its pro-growth measures suddenly get shut off.
“In the United States, growth should continue to strengthen as confidence is picking up in both businesses and households,” the report says. “More generally, growth seems to be increasingly driven by private-sector demand rather than by policy. Fiscal consolidation is dragging growth, but only at a moderate pace.
“However, the risk of excessive fiscal tightening in 2013 remains to be addressed. Long-term fiscal sustainability remains to be achieved, and a credible fiscal plan is needed to ensure it. Given the still-weak recovery and sluggish job creation,” the Federal Reserve should keep interest rates low to make money available, “conditional upon developments.”
The report’s reference to “excessive fiscal tightening” is financial language for what may well be a “train wreck” during the lame-duck session of Congress later this year: Payroll tax cuts expire, mandatory budget cuts – half from domestic programs and half from defense – start in January, and Congress will again have to vote on raising the debt ceiling. House Speaker John Boehner, R-Ohio, has threatened to use that vote to demand more budget cuts, but no tax cuts for the rich.
The combo could kill U.S. demand and throw the U.S. back into an official recession, OECD warns.