OECD Sees Lots to Worry About in the Global Economic Outlook

  • Faster growth forecast, but productivity remains too weak
  • Protectionism, market volatility pose risks to economy

Catherine Mann, chief economist at OECD, and former Bank of England Governor Mervyn King discuss the economic merits of a U.S. border adjustment tax and the outlook for U.S. economic growth. They speak on 'Bloomberg Surveillance.' (Source: Bloomberg)

The global economy may not be strong enough to withstand risks from increased trade barriers, overblown stock markets or potential currency volatility, according to the Organisation for Economic Cooperation and Development.

While forecasting a pickup in growth this year and next, it said the pace is still too slow and warned there’s much that could derail it. The OECD expects global expansion to reach 3.3 percent this year, up from 3 percent in 2016, and pick up again in 2018. But the pace will remain short of its average in the two decades before the financial crisis because of weak investment and productivity gains.

“We have acceleration but I’m concerned about this really soft foundation to the recovery,” OECD Chief Economist Catherine Mann said in an interview. “We still have this slow, sluggish productivity growth and persistent inequality. Put those together and it’s hard to see the robust consumption and investment profile you need to really get things going.”

Though not named in the report, some of the concerns are related to the policies of U.S. President Donald Trump’s administration, including his threats to impose tariffs on nations he deems to have an unfair advantage, The OECD also said there’s a “disconnect” between equity valuations and the outlook for the real economy, with the market performance partly linked to anticipation of a Trump stimulus package.

Source: OECD

“We think the dynamic response to increased protectionism could be really quick, so we have a pretty significant downward bias on what it could mean for growth,” Mann said. “What we mean by that is the way businesses will respond by raising prices and cutting trade flows.”

QuickTake: Free Trade and Its Foes

The OECD highlighted potential exchange rate volatility from the shift in the interest-rate cycle. The U.S. Federal Reserve is forecast to increase interest rates next week in what may be the start of a series of hikes this year. In contrast, the European Central Bank is pressing on with its planned stimulus program through 2017.

“Although risks may not materialize immediately, they remain a real possibility and a set of large shocks, possibly interacting with each other, would disrupt the recovery,” the OECD said.

Turkey is among the countries most exposed to a strengthening dollar because it has external debt amounting to more than 50 percent of gross domestic product, about half of which is denominated in dollars, while generating little revenue in that currency from exports. Mexico also has significant dollar liabilities of about a fifth of GDP, yet its dollar-generating exports offer it some protection, the OECD said.

Political risks may also assert themselves, especially in Europe where Germany, France and the Netherlands face elections. Confidence in national governments has slumped since 2007, notably in France, the U.S. and Greece, according to OECD data.

“Falling trust in national governments and lower confidence by voters in the political systems of many countries can make it more difficult for governments to pursue and sustain the policy agenda required to achieve strong and inclusive growth,” the OECD said.

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