OECD Downgrades Global Growth

The Organisation for Economic Co-operation and Development (OECD) is an international economic organisation of 34 countries, founded in 1961 to stimulate economic progress and world trade. The OECD promotes policies designed to achieve the highest sustainable economic growth and employment and a rising standard of living in Member countries, while maintaining financial stability, and thus to contribute to the development of the world economy.

According to the the OECD’s Economic Outlook, global growth prospects have clouded this year, the outlook for emerging-market economies is a key source of global uncertainty at present. The OECD trimmed its global economic forecasts for the second time in three months as slower growth in emerging markets spilled over into countries such as Germany and Japan. Worldwide gross-domestic-product expectations scaled back from 3 percent to 2.9 for 2015 and 3.3 percent down from 3.6 for 2016. This largely reflects further weakness in EMEs, with recessions in Brazil and Russia and the slowdown in China hitting activity in key trading partners.

The U.S. economy was projected to carry on growing relatively strongly despite the global turbulence. In the US, output remains on a solid growth trajectory, propelled by household demand, with GDP expansion expected to be 2.5% next year and 2.4% in 2017. The recovery in the euro area is set to strengthen, helped by accommodative monetary policy, lower oil prices and an easing of the pace of budget tightening. Euro area activity is expected to grow by 1.8% in 2016 and 1.9% in 2017. In Japan, recovery was derailed in 2015 by a sharp slowdown in demand from other Asian economies and sluggish consumption.

Japan’s GDP growth is expected to accelerate to 1.0% next year, but to slow to 0.5% in 2017 due to the planned consumption tax hike. Economic growth in China is projected to slow to 6.8% in 2015 and to continue to decline gradually thereafter, reaching 6.2% by 2017, as activity rebalances towards consumption and services. Achieving this rebalancing, whilst avoiding a sharp reduction in GDP growth and containing financial stability risks, presents significant challenges.

Global trade, which was already growing slowly over the past few years, appears to have stagnated and even declined since late 2014, with the weakness centering increasingly on emerging markets, particularly China. This is deeply concerning as robust trade and global growth go hand in hand. In 2015 global trade growth is expected to grow by a disappointing 2%. Over the past five decades there have been only five other years in which trade growth has been 2% or less, all of which coincided with a marked downturn of global growth.

The outlook for EMEs (Emerging Market Economies) is a particular source of global uncertainty, given their large contribution to global trade and GDP growth in the last few years. Many have been hit by lower commodity prices, some by weak export demand. Many EMEs have also seen a rapid accumulation of corporate debt in recent years. Volatile international capital flows could thus make servicing that debt much more difficult.

According to the OECD Economic Outlook, global growth will strengthen gradually and reach 3.6 percent by 2017. However, even this improvement hinges on the continuation of supportive macroeconomic policies, a pick-up in investment, continued low commodity prices and a steady improvement in labour market outcomes in the advanced economies. Between now and 2017, unemployment in OECD countries is expected to fall to 6.3%. But that’s still 39 million people who would be out of work in OECD countries, over 6 million more than before the crisis started.