Global economies stuck in low growth trap, Policy makers need to keep promises: OECD

Jun 06, 2016 (LBO) – The global economy is stuck in a low-growth trap that will require more coordinated and comprehensive use of fiscal, monetary and structural policies to move to a higher growth path, the OECD’s latest economic outlook says.

“Growth is flat in the advanced economies and has slowed in many of the emerging economies that have been the global locomotive since the crisis,” Angel Gurría, Secretary-General of Organisation for Economic Co-operation and Development (OECD) said while launching the Outlook at a forum in Paris recently.

“Slower productivity growth and rising inequality pose further challenges. Comprehensive policy action is urgently needed to ensure that we get off this disappointing growth path and propel our economies to levels that will safeguard living standards for all.”

According to the Outlook weak trade growth, sluggish investment, subdued wages and slower activity in key emerging markets will all contribute to modest global Gross Domestic Product growth of 3 percent in 2016, essentially the same level as in 2015.

Global recovery is expected to improve only in 2017 to 3.3 percent, it said.

The OECD highlights a series of policy requirements, including more comprehensive use of fiscal policy and revived structural reforms to break out of the low-growth trap.

The Outlook argues that reliance on monetary policy alone cannot deliver satisfactory growth and inflation.

Additional monetary policy easing could now prove to be less effective than in the past, and even counterproductive in some circumstances.

Many countries have room for fiscal policies to strengthen activity via public investment, especially as low long-term interest rates have effectively increased fiscal space.

While almost all countries have scope to reallocate public spending towards more growth-friendly projects, collective action across economies to raise public investment in projects with a high growth impact would boost demand and improve fiscal sustainability, the report said.

“Given the weak global economy and the backdrop of rising income inequality in many countries, more ambitious structural reforms – in particular targeting services sectors – can boost demand in the short-term and promote long-term improvements in employment, productivity growth and inclusiveness.”

The report goes on to say that among the major advanced economies, the moderate recovery will continue in the United States, which is projected to grow by 1.8 percent in 2016 and 2.2 percent in 2017.

The Euro area will improve slowly, with growth of 1.6 percent in 2016 and 1.7 percent in 2017.

In Japan, growth is projected at 0.7 percent in 2016 and 0.4 percent in 2017.

The 34 country OECD area is projected to grow by 1.8 percent in 2016 and 2.1 percent in 2017, according to the Outlook.

With rebalancing continuing in China, growth is expected to continue to drift lower to 6.5 percent in 2016 and 6.2 percent in 2017, supported by demand stimulus.

India’s growth rates are expected to hover near 7.5 percent this year and next, but many emerging market economies continue to lose momentum.

The deep recessions in Russia and Brazil will persist, with Brazil expected to contract by 4.3 percent in 2016 and 1.7 percent in 2017.

The Outlook also draws attention to a number of downside risks.

Most immediately, a United Kingdom vote to leave the European Union would trigger negative economic effects on the UK, other European countries and the rest of the world.

Brexit would lead to economic uncertainty and hinder trade growth, with global effects being even stronger if the British withdrawal from the EU triggers volatility in financial markets.

By 2030, post-Brexit UK GDP could be over 5 percent lower than if the country remained in the European Union.

“If we don’t take action to boost productivity and potential growth, both younger and older generations will be worse off,” said Catherine L. Mann, Chief Economist, OECD said.

“The longer the global economy remains in this low-growth trap, the harder it will be for governments to meet fundamental promises. The consequences of policy inaction will be low career prospects for today’s youth, who have suffered so much already from the crisis and lower retirement income for future pensioners.”