A sharp slowdown in global trade on the back of China’s troubles poses a threat to economic growth and calls for richer countries to step up investment while keeping monetary policy loose, a leading thinktank has warned.
In its twice-yearly outlook, the Organisation for Economic Co-operation and Development (OECD) highlighted risks from emerging markets and weak trade. The thinktank cut its forecast for global economic growth to 2.9% in 2015 and 3.3% in 2016, down from 3.0% and 3.6%, respectively, pencilled in at an interim update in September.
Presenting the outlook in Paris, OECD secretary general Angel Gurría said: “The slowdown in global trade and the continuing weakness in investment are deeply concerning. Robust trade and investment and stronger global growth should go hand in hand.”
The thinktank edged up its forecast for economic growth in the group of 34 OECD countries this year to 2.0% from 1.9% in June’s outlook, when it had noted a sharp dip in US growth at the opening of 2015. For 2016, it has cut the forecast for OECD countries’ growth to 2.2% from 2.5%.
The OECD left its forecasts for the UK little changed with growth of 2.4% this year and next, compared with a forecast for 2016 growth of 2.3% made in June. The US economy, the world’s biggest, is now recorded as growing 2.4% this year and 2.5% in 2016, compared with June’s forecasts of 2.0% and 2.8%.
The group repeated earlier recommendations that governments increase investment to help support growth. Such spending did not have to come at the expense of debt reduction given the likely boost to growth, it added.
“On the fiscal side, collective action to increase public investment would increase growth sufficiently to reduce debt-to-GDP ratios, as long as investment projects are of high quality and supported by good structural policies. These policy actions would make European growth a driver of the global economy,” the latest outlook said.
Policymakers and economists have been divided over whether cutting spending will eventually bring down countries’ debt piles or in fact prove counter-productive because it dents economic growth.
Trades union group TUC said that with borrowing costs at a record low, Osborne should heed the OECD’s advice about investment and put more money into building homes and modernising the UK’s energy and transport networks.
“Investing in infrastructure is a no brainer. It will pay for itself in the long-run by stimulating growth and creating the economic conditions that businesses need to thrive,” said TUC general secretary Frances O’Grady.
“By contrast, limiting investment and imposing severe cuts on vital public services will leave us less able to meet the economic challenges of the future and hold back our recovery at a time of global financial uncertainty.”
In the meantime, with global trade weak the OECD raised the spectre of recession.
Catherine Mann, OECD chief economist said: “Global trade, which was already growing relatively slowly over the past few years, appears to have stagnated and even declined since late 2014. This is deeply concerning. Robust trade and global growth go hand in hand.”
“The growth rates of global trade observed so far in 2015 have, in the past, been associated with global recession.”
She said sluggish trade growth in 2012 and 2013 appeared to have centred on advanced countries.
“In 2015, by contrast, weak global trade growth centers on emerging markets. Developments in China appear to be at the heart of this.”
Mann also commented on the refugee crisis and echoed other economists in noting likely benefits to European countries from immigration.
“A collective approach to the recent surge in asylum-seekers arriving in the EU would help to reduce political tensions. Given the right policies, asylum-seekers need not impose an unmanageable economic burden. Indeed, if the refugees who stay are rapidly integrated into European society, they are likely to benefit the host countries,” she said.
On the UK, the OECD said economic growth was projected to “continue at a robust pace over the coming two years, driven by domestic demand.”
“This projection assumes the Bank of England will begin to raise its policy rate in early 2016, and then raise it gradually through 2017 to ward off excess demand pressures,” it noted.
Although a new round of spending cuts will be announced by chancellor George Osborne later this month, the thinktank appeared to welcome his previous easing in the pace of government austerity measures.
“The pace of fiscal consolidation has appropriately been smoothed to around 1% of GDP per year and now involves smaller reductions in spending on public services than earlier planned.”
This article was written by Katie Allen, for theguardian.com on Monday 9th November 2015 10.57 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010