Global economy stuck in low-growth trap: Policymakers need to act to keep promises, OECD says in latest Economic Outlook

1/06/2016 – 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 and ensure that promises are kept to both young and old, according to the OECD’s latest Global Economic Outlook.

“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,” OECD Secretary-General Angel Gurría said while launching the Outlook during the Organisation’s annual Ministerial Council Meeting and Forum in Paris. “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,” Mr Gurría said.

Weak trade growth, sluggish investment, subdued wages and slower activity in key emerging markets will all contribute to modest global GDP growth of 3% in 2016, essentially the same level as in 2015, according to the Outlook. Global recovery is expected to improve only to 3.3% in 2017.

Among the major advanced economies, the moderate recovery will continue in the United States, which is projected to grow by 1.8% in 2016 and 2.2% in 2017. The euro area will improve slowly, with growth of 1.6% in 2016 and 1.7% in 2017. In Japan, growth is projected at 0.7% in 2016 and 0.4% in 2017. The 34-country OECD area is projected to grow by 1.8% in 2016 and 2.1% in 2017, according to the Outlook.

With rebalancing continuing in China, growth is expected to continue to drift lower to 6.5% in 2016 and 6.2% in 2017, supported by demand stimulus. India’s growth rates are expected to hover near 7.5% 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% in 2016 and 1.7% in 2017.

The Outlook 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% 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 OECD Chief Economist Catherine L Mann. “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.”

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.

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 OECD said.

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