Global economic growth remains strong but has passed its recent peak and faces escalating risks including rising trade tensions and tightening financial conditions, according to the OECD’s latest Economic Outlook.

 

Growth forecasts for next year have been revised down for most of the world’s major economies. Global GDP is now expected to expand by 3.5 per cent in 2019, compared with the 3.7-per-cent forecast in last May’s Outlook, and by 3.5 per cent in 2020.

 

In many countries, unemployment is at record lows and labour shortages are beginning to emerge. However, rising risks could undermine the projected soft landing from the slowdown. Trade growth and investment have been slackening on the back of tariff hikes. Higher interest rates and an appreciating US dollar have resulted in an outflow of capital from emerging economies and are weakening their currencies. Monetary and fiscal stimulus is being withdrawn progressively in the OECD area.

 

The shakier outlook in 2019 reflects deteriorating prospects, principally in emerging markets such as Turkey, Argentina and Brazil, while the further slowdown in 2020 is more a reflection of developments in advanced economies as slower trade and lower fiscal and monetary support take their toll.

 

“Trade conflicts and political uncertainty”

 

Presenting the Outlook, OECD Secretary-General Angel Gurría said: “Trade conflicts and political uncertainty are adding to the difficulties governments face in ensuring that economic growth remains strong, sustainable and inclusive. We urge policy-makers to help restore confidence in the international rules-based trading system and to implement reforms that boost growth and raise living standards – particularly for the most vulnerable.”

 

The Outlook says trade tensions are already harming global GDP and trade, and estimates that if the US hikes tariffs on all Chinese goods to 25 per cent, with retaliatory action being taken by China, then world economic activity could be much weaker. By 2021, world GDP would be hit by 0.5 per cent, by an estimated 0.8 per cent in the US and by one per cent in China. Greater uncertainty would add to these negative effects and result in weaker investment around the world. The Outlook also shows that annual shipping traffic growth at container ports, which represents around 80 per cent of international merchandise trade, has fallen to below three per cent from close to six per cent in 2017.

 

Tighter regulation decelerates growth in China

 

Growth in China has eased over the course of 2018 amid tighter rules on “shadow bank” financial intermediaries outside the formal banking sector, a more rigorous approval process for local government investment and new US tariffs on Chinese imports. 

 

Stimulus measures and easier financial conditions by the central bank may help to bolster slowing growth and help engineer a soft landing, but could also aggravate risks to financial stability, says the Outlook.

 

A much sharper slowdown in Chinese growth would damage global growth significantly, particularly if it were to hit financial market confidence.

 

Limited rooms for manoeuvre

 

With very low interest rates in many countries – particularly in the euro area – and historically high debt-to-GDP levels (both public and private), policymakers’ room for manoeuvre in case of a more marked global downturn is limited.

 

The Outlook says it is important to maintain the capacity for tax and spending policies to stimulate demand if growth weakens sharply. Although such fiscal space is limited, co-ordinated action will be far more effective than countries going it alone. The report advises that such action should be focused on growth-friendly measures – such as investment in physical and digital infrastructure and targeting consumption spending more towards the less well-off.

 

Slowdown may be even “more severe than projected”

 

Laurence Boone, OECD Chief Economist, said: “There are few indications at present that the slowdown will be more severe than projected. But the risks are high enough to raise the alarm and prepare for any storms ahead. Co-operation on fiscal policy at the global and euro level will be needed.

 

“Shoring up the global economy also involves responding to people’s concerns about the lack of improvements in wages, living standards and opportunities.,” she added. “Promoting competition to improve business dynamics can help by increasing workers’ bargaining position and lowering prices for consumers. Investing in skills is also crucial – it raises productivity and income and reduces inequality between workers.”

 

Digitalisaltion poses risk of widening inequalities

 

A special chapter in the Outlook shows how, as digitalisation spreads, the divide between high-skill, low-routine jobs and low-skill, high-routine work continues to grow, posing the risk of further widening inequalities. 

 

It says strengthening product market competition would not only prompt wider diffusion of new technologies, thereby raising productivity growth, but would also help transfer output and efficiency gains to wages.

 

Organisation for Economic Co-operation and Development (OECD) – a club of mostly rich countries – was established back in 1961 to encourage economic interdependence among member nations with the help of evidence-based analysis. The Organisation currently has 36 members, who fund its research work on the economy, tax avoidance and education.

 

To download the OECD’s presentation with summary of projections, go to: http://www.oecd.org/economy/outlook/Growth-has-peaked-amidst-escalating-risks-economic-outlook-presentation-11-2018.pdf