OECD urges action to break global economy out of “low-growth trap”

1 Jun 16

The global economy is stuck in a “low-growth trap”, the OECD has warned, urging policymakers to act before they are forced to fall short on their promises made to entire generations of people.

In its latest Global Economic Outlook, the think-tank said that global GDP in 2016 remained “essentially the same” as last year, with growth of 3%, thanks to weak trade, sluggish investment, subdued wages and slower activity in key emerging markets.

“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.

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

The OECD warned that a prolonged period of low growth has precipitated a “self-fulfilling low-growth trap”, where negative feedback loops constrain potential.

It forecasts only “moderate” and “slow” progress in the world’s major advanced economies, with growth edging above 2% by 2017 in the US only. The euro area and Japan will fare even worse both this year and next.

As China continues to rebalance its economy towards a more service-based and sustainable growth model, the OECD said the nation can expect to see its growth continue to fall.

The outlook predicts the country’s economy will grow by 6.5% in 2016 and 6.2% in 2017. This leaves India, with growth forecast at 7.5% for this year and the next, in place as the world’s fastest-growing major economy.

The country’s government published figures this week logging 7.6% growth over the 2015-16 fiscal year.

But the OECD said other emerging economies will continue to lose momentum. The outlook predicts the deep recessions in Russia and Brazil in particular will persist, with the latter’s economy expected to contract by 4.3% this year and 1.7% next year.

There are also a number of risks to this already gloomy outlook, with the most immediate being a UK exit from the European Union, the OECD said, threatening to trigger a negative shock that could tip the world back into another deep downturn.

The think-tank warned that the longer the global economy remains in this “low-growth trap”, the more difficult it will be to break out of it.

OECD chief economist Catherine Mann said if action isn’t taken to boost productivity and potential growth, “both younger and older generations will be worse off”.

“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 pensioners.”

She said that “policymaking is at an important juncture”. A more coordinated and comprehensive use of fiscal, monetary and structural policies are urgently needed, echoing the International Monetary Fund’s call for a three-pronged response.

The outlook argues that further reliance on monetary policy alone will be less effective and possibly even counterproductive in some circumstances.

The OECD reiterated its call for broader policy action with higher public investment and spending on growth-friendly projects used across economies to boost demand and improve fiscal sustainability.

It said “more ambitious” structural reforms, in particular targeting the services sectors, are also needed to boost demand and promote long-term improvements in employment, productivity growth and inclusiveness.

Mann said: “If policymakers act, they can deliver to raise the future path of output – which is the wherewithal for economies to make good on promises – to create jobs and develop career paths for young people, to pay for health and pension commitments, to ensure that investors receive adequate returns on their assets, and to safeguard the planet.”

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