OECD: Weakening Global Outlook; Favorable Review of Sovereign Wealth

The OECD’s latest composite leading indicators [CLIs] suggest a slowdown in economic activity lies ahead in the OECD area. February 2008 data indicate a weakening outlook for all the major seven economies. The latest data for major OECD non-member economies point to a downturn in China and India and slowing expansion in Brazil and Russia.

The CLI for the OECD area increased by 0.1 point in February 2008 but was 2.4 points lower than in February 2007. The CLI for the United States decreased by 0.1 point in February and was 2.5 points lower than a year ago. The Euro area’s CLI fell by 0.3 point in February and stood 2.8 points lower than a year ago. In February, the CLI for Japan rose by 0.4 point, but it was 4.7 points lower than the same month last year. The CLI for Japan is strongly influenced by its “dwellings started” component, showing a transitory change caused by modifications of the Building Standard Law. The CLI, however, has a weakening tendency even when the effect of this component is filtered out.

The CLI for the United Kingdom fell by 0.3 point in February 2008 and it was 1.3 point lower than February 2007. The CLI for Canada was unchanged in February but was 2.1 points lower than a year ago. For France, the CLI fell by 0.6 point in February and was 1.9 point lower than a year ago. The CLI for Germany decreased by 0.1 point in February and was 2.7 points lower than a year ago. For Italy, the CLI decreased by 0.2 point in February and stood 4.1 points lower than February 2007.

The CLI for China was down by 0.7 point in February 2008 and stood 3.5 point lower than a year ago. The CLI for India fell by 0.7 point in January 2008 and was 1.9 point lower than in January 2007. The CLI for Russia fell by 0.1 point in February, but its level was 2.9 points higher than a year ago. In February 2008 the CLI for Brazil dropped 0.6 point, but it stood 2.4 points higher than a year ago.

-----------------------------------------------------------

Questions about the role of Sovereign Wealth Funds in the global economy have come off the back burner in the wake several high-profile purchases and loans by Middle Eastern SWFs in recent months. Academia and prominent IGOs are beginning to pay a similar level of attention to the topic. At the request of the G7 finance ministers, the OECD has prepared a new report on SWFs, to be formally presented to the board of finance ministers in early June. The report generally takes a very positive tone towards SWFs:

National security is a legitimate concern but should not be cover for protectionist policies.

The report begins by noting the role SWFs have played recently in the subprime mortgage crisis: “SWFs have much to offer. SWF’s recent injections of capital into several OECD financial institutions were stabilising because they came at a critical time when risk-taking capital was scarce and market sentiment was pessimistic.”

The authors similarly note the benefits of SWFs to their home economies: SWFs “…generally have good track records as investors. They contribute to the economic well-being of their home countries; for example, they help to shield their economies from volatility in commodity markets, improve the risk-return profile of government-controlled portfolios and may boost fiscal and financial management capacities.”

The report outlines what the OECD considers appropriate guidelines for its member nations to follow:

Non discrimination. Foreign investors are to be treated not less favourably than domestic investors in like situations. While the OECD instruments protect directly the investment freedoms of those SWFs established in OECD member countries, they also commit mem-bers to using their best endeavours to extend the benefits of liberalisation to all members of the International Monetary Fund. Experience has shown that, in practice, OECD govern-ments nearly always adopt liberalisation measures without discriminating against non-OECD countries — investors from non-member countries reap the same benefits of free market access as OECD residents. Outright discrimination against non-OECD based in-vestors would be a major departure from OECD tradition.

Transparency. Information on restrictions on foreign investment should be comprehensive and accessible to everyone.

Progressive liberalisation. Members commit to the gradual elimination of restrictions on capital movements across their countries.

“Standstill”. Members commit to not introducing new restrictions.

Unilateral liberalisation. Members also commit to allowing all other members to benefit from the liberalisation measures they take and not to condition them on liberalisation measures taken by other countries. Avoidance of reciprocity is an important OECD policy tradition. The OECD instruments are based on the philosophy that liberalisation is beneficial to all, especially the country which undertakes liberalisation.