Europe, the Global Economic Outlook and the U.S.

By Raymond J. Keating

In its latest economic outlook published on May 25, the OECD is projecting further economic under-performance in the U.S. and among other developing nations in general.

The OECD says that the global economy is “gaining momentum,” but that “the recovery is fragile, extremely uneven across different regions.”

It’s forecasted that the Euro area will barely grow at 0.1% in 2012 and 0.9% in 2013. As for Japan, real GDP is expected to grow by 2% in 2012 and 1.5% in 2013.

Meanwhile, in the U.S., the OECD forecasts that real GDP will grow at 2.4% in 2012 and 2.6% in 2013.

It is crucial to remind ourselves that real GDP growth during economic recoveries in U.S. should be growing at better than 4%, and that even counting periods of recession, real annual GDP growth has averaged 3.3 percent post-World War II. So, if the OECD is right, this under-performing recovery is expected to labor on for the foreseeable future.

Where is the uncertainty in the OECD outlook? It is stated in the report, “Risks around the projection are extensive and predominantly on the downside…”

And what is the key downside risk? According to OECD Chief Economist Pier Carlo Padoan, “The crisis in the euro zone remains the single biggest downside risk facing the global outlook.”

In the report’s accompanying statement, it was explained: “In Europe, business and household confidence is weak, financial markets are tight and the adverse impacts of fiscal consolidation on near-term growth may be significant, particularly in countries hardest hit by the euro crisis… Recovery in the healthier economies, while welcome, is not strong enough to offset flat or negative growth elsewhere in Europe… The OECD warns that failure to act today could lead to a worsening of the European crisis and spillovers beyond the euro area, with serious consequences for the global economy.”

There is no doubt that Europe is a mess; is having negative effects on other economies; and threatens to do further damage to global growth.

But it’s also critical to acknowledge that European leaders don’t seem all that interested in dealing with the key issue restraining growth and generating debt woes, i.e., the size of government. Among the 27 EU nations, government spending sucked up 49.1 percent of GDP in 2011. That’s a growth strangling level of government. Until the size of government is reined in, Europe will remain, at best, a slow growth economy.

As for the U.S., the same basic issue is restraining growth. Total (federal, state and local) government spending as a share of GDP hit 36.5 percent in 2009 and 35 percent in 2010. Such levels were never reached in the post-World War II era. And compare those levels to the 28.8 percent level in 2000, and 30.9 percent as recently as 2007.

Throw into the U.S. mix, increased taxes, more regulation, a lack of leadership on trade and misguided monetary policy, and a deep recession and grossly under-performing recovery are not surprising.

No reason exists why the U.S. should not be leading the global economy, and taking others along with us to higher levels of growth, that is, other than the fact that all the wrong policy moves have been made for the past four-and-a-half years.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His new book is “Chuck” vs. the Business World: Business Tips on TV.

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