OECD forecasts slow, weak recovery

The editorial preface to the Organization for Economic Cooperation and Development's (OECD's) most recent semi-annual economic outlook is titled "Nearing the Bottom?" The June 24 report anticipates that, while OECD economic activities are "approaching [their] nadir," the recovery will be "both weak and fragile" - and also slow, according to the OECD's senior economist, Andreas Wörgötter, who spoke with The Prague Post about the outlook. Gross domestic product (GDP) in the EU is expected to contract 4.8 percent in 2009 and stand at zero percent in 2010. In the Czech Republic, growth will have a sharper contrast as GDP is forecast to contract 4.9 percent in 2009 but grow 1.4 percent in 2010.

The Prague Post: Economic indicators have been especially volatile during the crisis. How is the OECD finding it more difficult to create an outlook that can hold up for six months?

Andreas Wörgötter: This year, we also released what we called an "interim outlook" in March because we discovered, in the course of the year, that [January's outlook was] too far off. Our outlook relies partly on models, but we also judge how we think things are developing. The biggest function of the OECD's outlook is trade harmonization. In a nutshell, we're taking into account every country's exports and imports and summing it up so it should be more or less balanced, or zero.

TPP: Have economies really hit bottom in the recession?

AW: The headline of our outlook is "Nearing the Bottom?" - with a question mark. I think that's where we are, and I think that the freefall is over. Most indicators point to a further contraction in the second quarter, but I'm not just talking about the Czech Republic. We also believe the recovery will be weak and slow.

TPP: What do you mean by weak?

AW: Weak meaning growth rates around 1 percent or 2 percent for big countries like Germany and the UK, and maybe 2 percent and 3 percent for countries like the Czech Republic, Poland and Slovakia.

TPP: Some of the gloomier predictions say it will take countries more than 10 years to pay down the deficits run up by rescue packages. Is that accurate?

AW: Now, you have all sorts of weird predictions out there. Obviously debt consolidation will be a big issue, and not much time should be wasted to make public services more efficient. That can be done by making use of e-government, making sure people do not stay on benefit programs longer than absolutely necessary and closing loopholes in tax collection. That's a big topic also for the Czech Republic; we think there are opportunities to make tax collection more efficient. Governments will have to scratch for every effort in order to get back to sustainable finances.

TPP: The Czech Republic's economy is primarily based on exports, and, as a result, policy leaders have maintained the recession here is purely imported. In that case, is there anything the country can do to avoid the effects of a financial crisis?

AW: The Czech Republic's economy, of course, is tied to German export-oriented manufacturing, so the knock-on effect has been strong. The recession has been imported because of a combination of policy decisions in the past and a certain attractiveness of the Czech economy for foreign investments. The big lesson from this particular crisis is that, if you are a small open economy that wants to prosper, then you have to take into account that you will get hit by the market from time to time. There is no prospering, small, self-contained economy in the world. Albania tried, and currently North Korea is another example. If an economy wants to prosper, it must be globally active, and that means it is open to shocks worldwide.

TPP: Do you believe the former Czech government, under former Prime Minister Mirek Topolánek and Finance Minister Miroslav Kalousek, took the right steps in reaction to the crisis?

AW: I think the former government was quite brave in their attempts to make healthcare reforms. It's very laudable and not a vote-gaining exercise, but something that, when you sit back, look at the books and add up the numbers, you find out that someone has to do it. The government also took a lot of initiative in terms of tax benefit reforms. Many would say the 2007 welfare reform was at least as important as the 2008 personal income tax reform. They shifted income coming from wages over to consumption by lowering income tax rates and increasing the value-added tax rates. They also made some good steps in the right direction, maybe not enough though, with the regulatory impact analysis, which was something done to help prevent increases in red tape. The renovation of the bankruptcy law has also proven to be a good step.

TPP: On the international stage, do you think the same government was successful during the EU presidency?

AW: The headline of the Czech presidency was really great: "Europe Without Barriers." That's the project to work on. But, when you boil it down to what actually happened, I think about the Austrians still having their labor market closed, which is ridiculous. They will have to open it anyway in two years when their labor market will have even bigger problems. There was an impact on EU member countries in the message to make more efforts to regulate internal markets. From that point of view, I think it was good - even though it may have lacked spectacular signature-signing events.

Claire Compton can be reached at
ccompton@praguepost.com