The latest global economic update from the Organization for Economic Co-operation and Development contains few surprises about the feeble global outlook or the urgent need to address Europe's deepening woes. But financial markets should not dismiss this with their usual big yawn. The economic and fiscal dangers are rising, and with them the risks of a major correction.
Besides the lack of growth and ever-present threat of deflation in the battered euro zone, there are fresh geopolitical risks stemming from worsening conflicts in eastern Ukraine and the Middle East, as well as growing uncertainty about the outcome of the referendum on Scottish independence and its eventual repercussions.
A vote to leave the United Kingdom would obviously affect Britain's recovery prospects, but it could also set off a chain of negative events that would ripple across the European Union.
Toss in a slightly gloomier forecast for most major economies and the increasing vulnerability of debt-laden emerging economies to any new financial shocks – including reversals of fund flows and exchange-rate volatility – and there ought to be more than enough to shake markets out of their long spell of complacency.
But that's not what's been happening.
"The bullishness of financial markets appears at odds with the intensification of several significant risks," the OECD says in its new assessment. It notes that key equity markets have been hitting record highs while government bond yields in several industrial countries linger near all-time lows. Stock market volatility, meanwhile, has fallen to levels last seen just before the global financial crisis crushed everything in 2008.
"This highlights the possibility that risk is being mispriced and the attendant dangers of a sudden correction," the OECD says.
The developed world's think tank has lowered its projections of growth this year for most major economies, apart from India, which it now forecasts will expand 5.7 per cent in 2014, a sharp hike from its earlier guesstimate in May of 4.9 per cent. China remains unchanged at 7.4 per cent.
And the OECD is sticking to its essential view that growth everywhere but Europe will continue to expand at a moderate, though increasingly uneven, pace. That includes the U.S. which it now expects will grow at a 2.1-per-cent clip this year and a healthier 3.1 per cent in 2015, down from its previous forecast in May of 2.6 per cent in 2014 and 3.5 per cent next year.
After slashing its estimate for euro zone growth to a dismal 0.8 per cent this year and a mere 1.1 per cent in 2015, down from 1.2 per cent and 1.7 per cent, respectively, just four months ago, the organization urged the ECB to pull out all the stops to reverse the disastrous trend and keep deflation at bay.
"Recent actions by the European Central Bank are welcome, but further measures, including quantitative easing, are warranted," the OECD said in a statement.
As for our home and native land, growth is now projected at 2.3 per cent this year, second to Britain's 3.1 per cent in the Group of Seven, but down slightly from 2.5 per cent in its May assessment. Still, that handily beats Germany's 1.5 per cent, Japan's 0.9 per cent and France's 0.4 per cent.
As for the widening investment risks, a plethora of bearish analysts have been issuing similar warnings about frothy markets blowing bubbles for months. They point not only to anemic growth prospects but to a handful of key metrics that are firmly in nosebleed territory, such as the cyclically adjusted price-to-earnings ratio (CAPE) created by Nobel- winning economist Robert Shiller.
Just because the market has blithely ignored such signals doesn't mean they should be dismissed out of hand. If the dot-com bubble proved anything, it's that markets loaded with risk can keep on rising for quite some time.
Recent higher volatility in bond, stock and currency markets may signal that the dangers are starting to sink in. But it's too early to tell. And the OECD is right to flag its worries.