OECD Blasts Governments for Slipping Into ‘Low-Growth Trap’by
Distortions from ultra-loose monetary policy are growing
Global economy will fail to accelerate this year, OECD says
The global economy is slipping into a self-fulfilling “low-growth trap” where ultra-loose monetary policy risks doing more harm than good, the Organisation for Economic Cooperation and Development warned.
In a highly critical editorial in the OECD’s latest Economic Outlook, rich world governments bear the brunt of the blame for failing to revive demand and failing overhaul their economies in the wake of the financial crisis in 2008.
According to the Paris-based group, which advises its 34 member countries, too much of the burden of lifting growth has been left to central banks. After pushing interest rates below zero and pumping money into their economies through asset purchases, they are starting to see diminishing returns and their actions could even generate financial-market volatility.
“Overall a rather mediocre, a rather dismal outlook,” the OECD secretary-general, Angel Gurria, said in an interview with Bloomberg Television in Paris before the outlook was released. “Trade is growing at 2 to 3 percent; it should be growing at 7.”
The remarks underline the lackluster growth as many emerging markets struggle with a slump in commodity prices and rich economies such as Europe and the U.S. fail to return to the sort of performance they typically had before the global financial crisis in 2008.
“Monetary policy has been the main tool, used alone for too long,” OECD Chief Economist Catherine Mann said in the semi-annual report released Wednesday. “In trying to revive economic growth alone, with little help from fiscal or structural policies, the balance of benefits-to-risks is tipping.”
Mann also said that “negative feedback loops are at work.” Lack of demand, global uncertainties and slow reform progress are deterring investment, while trade growth remains too weak, she said.
“Monetary policy cannot revive near and long-term growth by itself, and distortions are increasing,” the OECD said. Ultra-low and negative rates have stressed bank profitability and created financial strains for pension funds and insurers, while becoming “less potent” in stimulating consumption, it said.
The worldwide recovery is set to stall this year, with output growing 3 percent. That forecast is unchanged from the organization’s Feb. 18 estimate and it would match the pace seen in 2015. Expansion should accelerate to 3.3 percent next year, the OECD said.
“Fiscal policy must be deployed more extensively and can take advantage of the environment created by monetary policy,” Mann said in her editorial introducing the report. “Governments today can lock in very low interest rates for very long maturities to effectively open up fiscal space.”
The OECD’s message echoes the mantra of European Central Bank President Mario Draghi, who has long called for governments to do more to stimulate growth. After the ECB’s April policy meeting, he said that “in order to reap the full benefits from our monetary policy measures, other policy areas must contribute much more decisively.”
While the OECD left its global growth forecast unchanged, it cut its 2016 projections for growth in the U.S. and Japan, while lifting the euro area.
U.S. gross domestic product is now expected to expand 1.8 percent this year instead of the 2 percent predicted in February. The 2017 forecast is unchanged at 2.2 percent.
In the U.S., “growth hit a soft patch at the turn of the year,” the OECD said. The Federal Reserve’s gradual policy will leave interest rates “supportive throughout the projection, which is broadly appropriate” given weakening inflationary pressures and ongoing weakness in global demand.
Euro-area 2016 growth was revised up to 1.6 percent from 1.4 percent, while next year’s estimate was maintained at 1.7 percent. The OECD kept its China forecasts at 6.5 percent this year and 6.2 percent in 2017.
Still, data on Wednesday signaled a slowdown ahead in the 19-nation currency block, with a Purchasing Managers Index for euro-area manufacturing slipping to 51.5 in May from 51.7 a month earlier.
“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,” Mann wrote. “As it is, a negative shock could tip the world back into another deep downturn.”
Gurria warned U.K. voters that opting to leave the European Union in a referendum June 23 would penalize the country economically, wiping the rough equivalent of a month’s wages off potential incomes, according to OECD calculations.
Brexit is “a threat, but mostly it’s a threat to the well-being of the U.K.,” Gurria said. “It’s like a tax” but one “for which you get nothing in return.”