Medium and Long-term Developments – Challenges and Risks published by OECD (2011).
The recovery is projected to strengthen in the near term, but there are concerns about the longer-term legacy of the crisis, particularly because of the emergence of unsustainable fiscal imbalances as well as the possible damage to long-term growth prospects. Based on a technical exercise, this chapter considers macroeconomic prospects for OECD economies to the middle of the next decade and the challenges and the associated risks. The projections described in Chapters 1 and 2 suggest that nearly all OECD economies are expected to improve their fiscal balances over the course of this year and next. However, for many this will still leave fiscal balances too weak to stabilise government debt and for others, where debt is stable, it will be at levels which remain too high. Moreover, this chapter also discusses whether the crisis could have a long-lasting adverse effect on the growth rate of output, particularly as a consequence of large fiscal imbalances or continuing financial fragilities, and so lead to a prolonged period of stagnation. An alternative risk of “stagflation” – stagnation combined with inflation – might arise as a consequence of continuing upward pressure on oil and other commodity prices. These risks are examined in the context of previous historical episodes of stagnation and the implications for policy are considered.
