Global economic growth remains strong but faces escalating risks, including rising trade tensions and tightening financial conditions, said OECD’s in its latest Economic Outlook. Growth forecasts for next year have namely been revised down for most of the world’s major economies. Global GDP is now expected to expand by 3.5% in 2019, compared with the 3.7% forecast in last May’s Outlook, and by 3.5% in 2020.
The Outlook notes that trade growth and investment have been slackening on the back of tariff hikes, while higher interest rates and an appreciating US dollar resulting in an outflow of capital from emerging economies and weakening their currencies. Monetary and fiscal stimulus is being withdrawn progressively in the OECD area.
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,
…said OECD Secretary-General Angel Gurría, presenting the Outlook.
The Outlook also says trade tensions are already harming global GDP and trade, and estimates that if the US hikes tariffs on all Chinese goods to 25%, with retaliatory action being taken by China, world economic activity could be much weaker.
By 2021, world GDP would be hit by 0.5%, by an estimated 0.8% in the US and by 1% 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% of international merchandise trade, has fallen to below 3% from close to 6% in 2017.
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.
With very low interest rates in many countries – particularly in the euro area – and historically high debt-to-GDP levels, policy-makers’ 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, coordinated action will be far more effective than countries going it alone. 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.
Cooperation 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. 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,
…said Laurence Boone, OECD Chief Economist.