…But, will risks derail the modest recovery?

Global economic growth is expected to pick up modestly next year to around 3.6 % from a projected 3.3% in 2017 but risks of rising protectionism, financial vulnerabilities, potential volatility from divergent interest rate paths and disconnects between market valuations and real activity hang over the outlook

The projected improvement largely reflects continuing and expected combined fiscal and structural initiatives in the major economies – notably China, Canada and the United States – together with a slightly more expansionary stance in the euro area, which could be more ambitious.

Growth is still too weak and its benefits too narrowly focussed to make a real difference to those who have been hit hard by the crisis and who are being left behind. Now, more than ever, governments need to take actions that restore people’s confidence while at the same time resisting turning inwards or rolling back many of the advances that have been achieved through greater international co-operation.

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March 7, 2017 – Global economic growth is expected to pick up modestly next year to around 3.6 % from a projected 3.3% in 2017 but risks of rising protectionism, financial vulnerabilities, potential volatility from divergent interest rate paths and disconnects between market valuations and real activity hang over the outlook, according to the OECD.

The projected improvement largely reflects continuing and expected combined fiscal and structural initiatives in the major economies – notably China, Canada and the United States – together with a slightly more expansionary stance in the euro area, which could be more ambitious. Such policies are needed to catalyse private demand to boost global activity and reduce inequalities.

The global economy portrayed by the Interim Economic Outlook remains beset by sub-par GDP growth and high inequality, calling for policy responses that advance inclusive growth in the context of increased economic integration.

Commenting on the Outlook, OECD Secretary-General Angel Gurría said: “Growth is still too weak and its benefits too narrowly focussed to make a real difference to those who have been hit hard by the crisis and who are being left behind. Now, more than ever, governments need to take actions that restore people’s confidence while at the same time resisting turning inwards or rolling back many of the advances that have been achieved through greater international co-operation.”

The OECD’s Interim Economic Outlook examines some of the many risks that could derail the projected modest upturn in global growth.

Foremost among these there is the risk of rising protectionism that would hurt global growth and impact the large number of jobs that depends on trade. The rapid growth of private sector credit and the relatively high level of indebtedness is a key risk in a number of emerging markets, above all in China, and housing valuations are a matter of concern in some advanced economies.

The strength of financial market valuations appears disconnected to the outlook for the real economy, where the growth of consumption and investment remains subdued. There is also a risk of global financial market tensions as interest rates adjust and diverge across the major economies. The social cost of the crisis and the increased inequalities need to be addressed to make growth more inclusive and to reduce pressures for protectionism and other populist responses.

OECD Chief Economist Catherine L. Mann said: “The pick-up in growth from countries taking fiscal initiatives is broadly welcome, but we cannot ignore the danger that the recovery gets knocked off track by policy errors or financial risks and vulnerabilities. Coherent and committed policy action is needed to simultaneously raise growth rates and improve inclusiveness.”

In the United States, domestic demand is set to strengthen, helped by gains in household wealth and a gradual upturn in oil production. GDP growth is expected to pick up to 2.4% this year and 2.8% in 2018, supported by an anticipated fiscal expansion, despite higher long-term interest rates and a stronger dollar.

The moderate pace of growth is expected to continue in the euro area but is being held back in some countries by stubbornly high unemployment and underemployment – particularly of youth – as well as by banking sector weakness. GDP for the area as a whole is expected to expand at an annual rate of 1.6% in both 2017 and 2018.

In Japan, fiscal easing and improvements to women’s labour force participation will help GDP growth pick up this year to 1.2% from 1.0% in 2016. Prospects will depend on the extent to which labour-market duality is reduced and wage growth picks up.

Growth in China is projected to slip further to 6.5% this year and to 6.3% in 2018 as the economy makes a necessary transition away from a reliance on external demand and heavy industry toward domestic consumption and services.

Higher commodity prices and easing inflation are supporting a recovery from deep recessions in Brazil and Russia.

The OECD says governments need to manage risks, enhance economic resilience and strengthen the environment to boost growth, with improvements in both productivity and inclusiveness. Focussing on policies that build structural elements into fiscal initiatives would reduce the burden on monetary policy in the advanced economies and help to boost trade, investment, productivity and wages.

The Interim Economic Outlook is available [here.]

The OECD’s latest monthly Composite Leading Indicator, designed to anticipate turning points in economic activity, also released today, is available [here.]

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March 7, 2017 – Global GDP growth is projected to pick up modestly to around 3½ per cent in 2018, from just under 3% in 2016, boosted by fiscal initiatives in the major economies. The forecast is broadly unchanged since November 2016. Confidence has improved, but consumption, investment, trade and productivity are far from strong, with growth slow by past norms and higher inequality.

Disconnect between financial markets and fundamentals, potential market volatility, financial vulnerabilities and policy uncertainties could, however, derail the modest recovery. The positive assessment reflected in market valuations appears disconnected from real economy prospects. The interest-rate cycle turned in mid-2016 and rising divergence in interest rates between major economies heightens risks of exchange rate volatility. Vulnerabilities remain in some advanced economies from rapid house price increases. Risks to emerging market economies are high, including from higher corporate debt, rising non-performing loans and vulnerability to external shocks.

Policy needs to manage risks, strengthen growth and ensure it is more inclusive. Countries should use increased fiscal space to implement effective fiscal initiatives that boost demand and make government taxes and spending more supportive of long-term growth and equity. A durable exit from the low-growth trap also requires greater political commitment to implement structural reform packages to boost inclusive growth. These should combine policies to develop skills, remove barriers to competition and trade, and improve labour market policies in a way that raises overall incomes and shares the gains widely.

A stronger growth environment would enhance resilience. Countries should have robust early warning systems and supervision, use macroprudential instruments appropriately and promote effective approaches to managing and resolving non-performing loans. It is important to maintain open and transparent global markets for capital, goods and services.

Global growth is set to pick-up modestly, but remains too slow [Continue to Read]

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March 7, 2017 – Global growth is projected to pick up to around 3½ per cent in 2018, from just under 3% in 2016 in our latest Interim Economic Outlook. The forecast modest recovery is supported by fiscal initiatives in major economies and broadly unchanged from the November Economic Outlook. While the pick-up is welcome, it would still leave global growth below the historical average of around 4% for the two decades prior to the crisis.

This comes against the background of a five-year period where the global economy has been stuck in a low-growth trap. Consumption, investment, trade and productivity are far from strong and inequality is rising. Productivity gaps between frontier firms and laggard firms have widened, contributing to a growing income gap as wages have stagnated at less productive firms.

Moreover, financial vulnerabilities and policy risks and could derail the modest recovery. There are apparent disconnects between the positive assessment reflected in financial market valuations and forecasts for the real economy. For example, equity prices have increased significantly over the past six months, despite the large rise in nominal interest rates and with long-term real GDP growth and inflation expectations barely changed.

The global interest-rate cycle turned in mid-2016. Some normalisation of interest rates as a result of rebalancing demand support from monetary to fiscal policy is welcome. However, the market response to higher rates, following a prolonged period of exceptional monetary stimulus and low yields, may not be smooth. Market expectations imply a rising divergence in short-term rates between the major advanced economies in the coming years. This creates risk of exchange rate volatility, which could lead to wider instability in financial markets.

Risks to emerging market economies are high, including from high and rapid growth in private credit, notably in China, and rising non-performing loans, particularly for India and Russia. Many emerging market economies are also vulnerable to external shocks and currency mismatches, particularly those with high levels of overseas borrowing or those with a mismatch between foreign currency denominated debts and export revenues. [ Continue to Read]

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