Emerging economies hurting but developed nations on the mend, OECD says

While economic growth has slowed in emerging economies, it continues to proceed at an "encouraging" pace in North America, Japan, the U.K. and other developed nations, the OECD said in its latest report on the state of the global economy.

Growth in developed economies improving but risks remain, interim assessment of global economy says

The economies of developed nations like Germany, above, grew at an 'encouraging' pace in the second quarter, but emerging economies like India suffered because of capital flight spurred by the expected end to U.S. stimulus funding, the OECD said Tuesday. (Michaela Rehle/Reuters)

While economic growth has slowed in emerging economies, it continues to proceed at an "encouraging" pace in North America, Japan, the U.K. and other developed nations, the OECD said in its interim assessment of the global economy.

Although several countries in the eurozone remain in recession, the region as a whole has emerged from recession and in the second quarter of 2013, its GDP "bounced back from a period of exceptional weakness in late 2012 and the  first quarter of 2013, ending six quarters of contraction," the Organization for Economic Co-operation and Development said Tuesday. 

Other developed economies, such as those of the U.S. and Japan, continued their path to recovery in the second quarter.

GDP in the U.S. grew by 2.5 per cent, annualized, while in Germany and the U.K. it was up 2.9 per cent. Canada's economic growth was down slightly at 1.7 per cent, versus 2.2 in the first quarter.

The OECD forecast continued growth in the latter half of the year for developed economies.

The OECD's three largest economies — the U.S., Japan and Germany — were expected to expand at an annualized rate of 2.5 per cent in the third and fourth quarters. France's economy was forecast to grow by about 1.5 per cent, annualized, in that period while in Italy, growth is expected to remain mildly negative.

Canada's economy was expected to expand by 2.5 per cent, annualized, in the fourth quarter, taking the effects of the June floods in Alberta and a construction strike the same month in Quebec into account.

The OECD warned, however, that while the improvement in growth is a welcome sign of recovery, "a sustainable recovery is not yet firmly established and important risks remain."

Unemployment rates are around 12 per cent in the euro area and 7.5 per cent in the U.S., still far above what they were before the 2008 financial crisis, the OECD said. 

China still growing but more slowly

China's economy is still growing but at a slower pace, the OECD said. GDP growth slowed in the first two quarters of the year — 6.6 per cent and 7.0 per cent, respectively — but was expected to reach eight per cent by the final quarter of this year. 

Emerging economies have been hit by a pullback of investor capital in anticipation of tapering of the U.S. Federal Reserve's bond-buying program. Bond yields have spiked as investors look to unwind some of the "hot money" (which gravitates toward high interest rates) they have pumped into local-currency government debt in emerging markets..

The anxiety over an end to the $85 billion US the Fed has been investing in U.S. treasury bonds and mortgage-backed securities each month has led to significant market instability, rising costs of financing, capital outflows and currency depreciations, the OECD said.

"Countries that have relied heavily on portfolio inflows to finance large current account deficits have been most affected," the OECD said, pointing to India and Indonesia as two countries whose economies have been particularly hard hit

The OECD said the slowdown in emerging economies is a drag on near-term growth globally and won't be entirely offset by the boost in the advanced economies because emerging economies "now account for a large share of the world economy."