The world risks getting caught in a low-growth trap, denting the future of generations to come, unless governments step up spending quickly, the Organisation for Economic Co-operation and Development (OECD) warned yesterday. Tepid recovery since the global economic crisis in 2008 "has precipitated a self-fulfilling low-growth trap" said Catherine Mann, the chief economist at the OECD. "Without comprehensive, coherent and collective action, disappointing and sluggish growth will persist, making it increasingly difficult to make good on promises to current and future generations," she added in an introduction to the OECD's twice-yearly economic outlook.
The OECD chopped its forecast for global growth this year to 3 percent, down from the 3.6 percent it forecast in October 2015. It now predicts 3.3 percent growth for 2017. The dismal economic recovery has created forces that are now working to perpetuate slow growth, the OECD believes. In particular, businesses have little incentive to invest given tepid demand, while muted wage gains, unemployment and wealth inequality have held back consumption. Uncertainty has also put the brakes on spending.
Step up spending
After years of international economic instructions urging governments to practice austerity, Mann said "fiscal policy must [now] be deployed more extensively." The OECD said "almost all countries have room to reallocate spending and taxation toward items that offer more support to growth" like investments in infrastructure as well as education. While central banks have been supporting the global recovery with ultra-low interest rates and stimulus measures, the OECD said "it is clear that reliance on monetary policy alone has failed to deliver satisfactory growth and inflation." Moreover, today's low interest rates also provide an opportunity for governments to step up investment. Mann said the need for governments to shift up spending is urgent. "The longer the global economy remains in the low-growth trap, the more difficult it will be to break the negative feedback loops, revive market forces and boost economies to the high-growth path," she said. She warned that as things stand negative shocks "could tip the world back into another deep downturn" while geopolitical risks to the global economy are on the rise.
The OECD sees the potential exit of Britain from the European Union following a referendum vote later this month as one major risk. If voters chose to leave, hits to trade, investment and spending would likely see the British economy grow 3 percent less over the next four years than if voters choose to stay, according to the OECD. Uncertainty surrounding a possible Brexit "has [already] led to a significant slowdown in economic activity," but the OECD said it expects growth to pick up in the second half of this year if voters choose to stay. If Britain votes to remain in the EU in the referendum, which according to polls is a close call, the OECD expects growth to be at 1.75 percent this year.
World markets went into a panic at the beginning of this year over the prospect of a sharp slowdown in China, which has been the source of most of global growth in recent years, but the OECD now sees growth moderating gradually thanks to recent government fiscal policy measures to support the economy. It forecasts China's growth rate will slip to 6.5 percent this year, and then 6.2 percent in 2017. China's economy grew 6.9 percent last year. The strong dollar is expected to slow growth in the United States to 1.8 percent this year, from 2.4 percent last year. Meanwhile, the eurozone is seen as marking time at 1.6 percent growth. Japan should get a marginal boost, with growth of 0.7 percent this year, but then stumble to a mere 0.4 percent expansion in 2017.