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Several quarters of weak growth lie ahead for most OECD economies. At the same time, headline inflation could remain high for some time to come. This scenario is the combined outcome of financial market turmoil, cooling housing markets and sharply higher commodity prices. The projections in this OECD Economic Outlook carry both upside and downside risks and embody the following main features:
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The odds are improving that financial market turmoil has passed its peak. Still, its fallout will continue to act as a brake on growth for considerable time to come. Other headwinds causing the on-going slowdown in activity in the OECD area are likely to continue, including cooling housing markets and high commodity prices. Weakness has been most marked in the United States. However, despite buoyancy during the first quarter of 2008 in Japan and Germany, the slowdown is set to generalise across virtually all OECD economies (Table 1.1). There is also some slowdown outside the OECD area, albeit partly induced by policies aimed at restraining inflation.
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The increases in real energy and capital costs caused by the oil price shock and financial turmoil are likely to reduce the productive potential of OECD economies. The extent and the speed of these effects are very difficult to estimate and will depend on how permanent the shocks prove to be. At the same time, past and ongoing structural reforms are boosting potential output, but with long and unknown lags. The net effect has been to increase the uncertainty that surrounds measures of economic slack, such as the “output gap”, the unpredictability of which is a recurrent difficulty for macroeconomic policy setting at the best of times. At the current juncture, heightened uncertainties about supply-side developments combine with weakening activity and concerns about inflation to compound the risk of policy errors.
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