Since the 2001 slowdown, the world economy has moved in fits and starts and economists as well as the general public are now longing for a smooth and sustained recovery, undisturbed by chronic geopolitical risks or abrupt gyrations in oil prices and financial markets. Although economic fortunes have been contrasting over the past few quarters, with the United States forging ahead, East Asia slowing but from a rapid pace, and Continental Europe plodding along, households seem to have been lacking confidence OECD-wide. This pervasive sense of uncertainty has proved somewhat contagious since after a year of record growth in world trade, business confidence has fallen back to just above the historical average in the United States and Europe, dashing hopes that GDP would keep growing above trend over the next few months. Compared to cautiously upbeat assessments that could be made even two months ago, this turnaround ...

This volume analyses the major trends that will mark the next two years. It provides in-depth coverage of the main short-term economic challenges as well as the measures required to foster growth in each member country. Forthcoming developments in major non-OECD economies are also evaluated in detail.

The oil price has more than doubled in dollar terms since the late 1990s, while increasing substantially, though somewhat less, in terms of the other major currencies. The chapter begins by investigating the fundamentals driving longer-term oil market developments and the implications for the long-run equilibrium price. It then identifies short-term influences which may have caused risk premia to rise, volatility to increase, and the oil price to diverge from its equilibrium. It concludes with an assessment of the impact of higher oil prices on OECD growth and inflation and the implications for economic policy.

Fiscal policy has been used as an antidote to weak activity during the most recent downturn and fiscal consolidation has been delayed in some countries because of its perceived costs in terms of lower activity. However, the impact of fiscal policy on aggregate demand depends on the responses of private saving to changes in fiscal stance. In certain circumstances budget deficit shifts can be offset by simultaneous compensating changes in private saving. This chapter examines the possible extent of such offsets, focusing on the case where co-movements in private and public saving may be related to uncertainties about how long a budget deficit can be sustained and the consequent need to provide against future tax “surprises”.