The global economy is stuck in a low-growth trap that will require more coordinated and comprehensive use of fiscal, monetary and structural policies to move to a higher growth path and ensure that promises are kept to both young and old, according to the OECD’s latest Global Economic Outlook.
“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 while launching the Outlook during the Organisation’s annual Ministerial Council Meeting and Forum in Paris. “Slower productivity growth and rising inequality pose further challenges. Comprehensive policy action is urgently needed to ensure that we get off this disappointing growth path and propel our economies to levels that will safeguard living standards for all,” Mr Gurría said.
Ministers, Ambassadors, Ladies and Gentlemen,
Let’s now move to the next session of our joint OECD Forum and Ministerial Council Meeting: the launch of the 2016 OECD Economic Outlook. Before handing over to our Chief Economist Catherine Mann, who will walk you through our projections and the key findings of the Outlook, let me put the main messages of the report in a somewhat broader context.
We see the world economy stuck in a low-growth trap. Global growth is projected to continue to limp along at around 3% this year, and to pick up only modestly in 2017. Moreover, this pick-up hinges on avoiding significant downside risks, such as Brexit and financial disruptions in emerging markets linked to high corporate debt and exchange rate risks.
This low-growth trap involves a cycle in which diminished expectations become self-fulfilling. Firms witnessing low demand growth are naturally cautious about expanding investment. Weak investment holds back capital deepening and hinders the pace at which innovation is embodied in plant and equipment. The result is slow productivity growth, which makes households pessimistic about the pace at which living standards are increasing and restrains the growth of consumption. This slow growth of consumption feeds back onto firms’ expectations about demand growth, resulting in weak investment. The vicious cycle repeats itself.
Of course, this story does not fit exactly for all economies and there are additional shocks and factors at play. Overall, however, something like this dynamic appears to have been affecting the world economy over the past five years. It is a dynamic in which chronically weak demand interacts with a lack of structural dynamism to produce slower growth, scarred labour markets and dangerously low inflation.
The Economic Outlook charts a way out of this trap. As the Outlook emphasises, governments need to use all the policy tools they have at hand in a concerted and coherent way. There is now clear evidence about the limits of what monetary stimulus can achieve on its own. Thus, fiscal and structural policies have to be deployed more forcefully to complement monetary policy.
In this respect, three messages in the Outlook are particularly important:
First, in many countries fiscal spending can be expanded or reallocated to more growth-enhancing items. An increase in public investment of half a per cent of GDP in all OECD countries would boost GDP by about 0.6 percentage points on average across the OECD region in the first year, while the public debt-to-GDP ratio would decline in most OECD countries.
Second, collective action is key. For example, an increase in public investment involving all OECD countries would on average boost growth in a given country in the first year by 0.2 percentage points more than an increase in that country on its own.
Finally, actions across a broad range of reform objectives, such as investment, innovation, product market competition, market regulations, better skills, labour mobility and financial market robustness are essential in order to help reverse the widespread slowdown in productivity.
Another possible aspect of the dynamic which is at the centre of this year’s MCM is the interaction between productivity and inequalities, the NEXUS, as we call it.
The sluggish recovery in advanced economies is increasing inequality. The long-term unemployed not only experience extended periods with low income, but also see a deterioration of skills that hurts their longer-term earnings prospects.
But it may also be that high and rising inequality has contributed to the productivity slowdown. If the young have greater difficulty entering the labour market – and especially getting good full-time jobs – their development, and the growth potential of the economy, may be permanently impaired. A concentration of rents in some firms, whether because of technology, lack of competition, or bad regulation, can result in both more concentrated income and wealth in the economy and a weaker diffusion of innovation across firms, hindering productivity growth.
If we fail to reverse the productivity slowdown and if we fail to stop inequalities from rising further, we will be putting at risk the living standards of a large part of our societies. This is why “Enhancing Productivity for Inclusive Growth” is the theme of our MCM, why it is the topic of a special chapter in this year’s Economic Outlook and why the OECD will continue its work in this area in the years ahead. In fact we are already at it: our work on education, skills, innovation, taxes, anti-corruption, inclusive growth, development, regulation, justice are all integral components of the NEXUS. They are all crucial to enhance productivity and generate inclusiveness.
Ministers, Ambassadors, Ladies and Gentlemen,
We can enhance both productivity and inclusive growth; they are mutually reinforcing. We can; we must; we will.
I now give the floor to our Chief Economist, Catherine Mann.
WEBCAST: Presentation of the Economic Outlook
Weak trade growth, sluggish investment, subdued wages and slower activity in key emerging markets will all contribute to modest global GDP growth of 3% in 2016, essentially the same level as in 2015, according to the Outlook. Global recovery is expected to improve only to 3.3% in 2017.
Among the major advanced economies, the moderate recovery will continue in the United States, which is projected to grow by 1.8% in 2016 and 2.2% in 2017. The euro area will improve slowly, with growth of 1.6% in 2016 and 1.7% in 2017. In Japan, growth is projected at 0.7% in 2016 and 0.4% in 2017. The 34-country OECD area is projected to grow by 1.8% in 2016 and 2.1% in 2017, according to the Outlook.
With rebalancing continuing in China, growth is expected to continue to drift lower to 6.5% in 2016 and 6.2% in 2017, supported by demand stimulus. India’s growth rates are expected to hover near 7.5% this year and next, but many emerging market economies continue to lose momentum. The deep recessions in Russia and Brazil will persist, with Brazil expected to contract by 4.3% in 2016 and 1.7% in 2017.
The Outlook draws attention to a number of downside risks. Most immediately, a United Kingdom vote to leave the European Union would trigger negative economic effects on the UK, other European countries and the rest of the world. Brexit would lead to economic uncertainty and hinder trade growth, with global effects being even stronger if the British withdrawal from the EU triggers volatility in financial markets. By 2030, post-Brexit UK GDP could be over 5% lower than if the country remained in the European Union.
“If we don’t take action to boost productivity and potential growth, both younger and older generations will be worse off,” said OECD Chief Economist Catherine L Mann. “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 future pensioners.” ( Watch the full presentation by OECD Chief Economist Catherine L Mann)
The OECD highlights a series of policy requirements, including more comprehensive use of fiscal policy and revived structural reforms to break out of the low-growth trap.
The Outlook argues that reliance on monetary policy alone cannot deliver satisfactory growth and inflation. Additional monetary policy easing could now prove to be less effective than in the past, and even counterproductive in some circumstances.
Many countries have room for fiscal policies to strengthen activity via public investment, especially as low long-term interest rates have effectively increased fiscal space. While almost all countries have scope to reallocate public spending towards more growth-friendly projects, collective action across economies to raise public investment in projects with a high growth impact would boost demand and improve fiscal sustainability.
Given the weak global economy and the backdrop of rising income inequality in many countries, more ambitious structural reforms – in particular targeting services sectors – can boost demand in the short-term and promote long-term improvements in employment, productivity growth and inclusiveness, the OECD said.
For more information on the Economic Outlook, see: http://www.oecd.org/economy/economicoutlook.htm