OECD pares back world economic growth forecast

The latest projection of 3% global GDP growth is below the long-term average.

The OECD has further downgraded its projections for the world economy from 3.3% to 3%, saying strong growth remains elusive.

Its latest Interim Economic Outlook forecasts only a modest recovery in advanced economies and slower activity in emerging markets.

The world economy is likely to expand no faster in 2016 than in 2015, its slowest pace in five years.

“Trade and investment are weak. Sluggish demand is leading to low inflation and inadequate wage and employment growth,” it says.

The downgrade since the previous Economic Outlook in November 2015 is broadly based, spread across both advanced and major emerging economies, with the largest impacts expected in the US, the euro area and economies reliant on commodity exports, such as Brazil and Canada.

Financial instability risks are substantial, as demonstrated by recent falls in equity and bond prices worldwide, and increasing vulnerability of some emerging economies to volatile capital flows and the effects of high domestic debt.

“Global growth prospects have practically flat-lined, recent data have disappointed and indicators point to slower growth in major economies, despite the boost from low oil prices and low interest rates,” OECD chief economist Catherine Mann says.

“Given the significant downside risks posed by financial sector volatility and emerging market debt, a stronger collective policy approach is urgently needed, focusing on a greater use of fiscal and pro-growth structural policies, to strengthen growth and reduce financial risks.”

The OECD projects 3.3% growth in 2017, down from 3.6% previously and well below long-run averages of around 3.75%.  This is also lower than would be expected during a recovery phase for advanced economies, and given the pace of growth that could be achieved by emerging economies in convergence mode.

India shines among country forecasts
In country forecasts, the OECD says the US will grow by 2% this year and by 2.2% in 2017; the UK by 2.1% and 2%; Canada by 1.4% and 2.2%; and Japan by 0.8% and 0.6%.

The euro area is projected to increase at a 1.4% rate in 2016 and a 1.7% pace in 2017; Germany by 1.3% and 1.7%; France by 1.2% and 1.5%; and Italy by 1% and 1.4%.

China’s growth is forecast at 6.5% in 2016 and 6.2% in 2017 as it continues to rebalance its economy from manufacturing to services. India will set the global pace at 7.4% in 2016 and 7.3% in 2017. By contrast, Brazil will shrink 4% this year and only to begin to emerge from the downturn next year.

The OCED calls for a stronger policy response, changing the mix to confront the weak growth more effectively.

It says sole reliance on monetary policy has proven insufficient to boost demand, while fiscal policy is contractionary in several major economies and structural reform momentum has slowed.
 
“With governments in many countries currently able to borrow for long periods at very low interest rates, there is room for fiscal expansion to strengthen demand in a manner consistent with fiscal sustainability,” Ms Mann says.

“The focus should be on policies with strong short-run benefits and that also contribute to long-term growth. A commitment to raising public investment would boost demand and help support future growth.”

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