Weak trade weighs on world economic growth prospects in 2016-17—OECD

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auckland_waterfrtThe global economy will grow by just 2.9% this year and 3.2% in 2017, which is well below long-term averages of around 3¾ percent, as weak trade growth and financial distortions are exacerbating slow global economic growth, according to the Organization for Economic Cooperation and Development’s (OECD) latest Interim Economic Outlook.

This forecast is largely unchanged since the outlook’s June 2016 edition, as a gradual improvement in major emerging market commodity producers is offset by weaker conditions in advanced economies, including the effects of Brexit.

“Overall, the world economy remains in a low-growth trap with persistent growth disappointments weighing on growth expectations and feeding back into weak trade, investment, productivity and wages,” the report said.

The outlook noted how global trade growth has slowed to half its pre-crisis rate, contracting at the start of 2016 with the current weakness concentrated in Asia. While low investment has played a role, rebalancing in China and a reversal in the development of global value chains could signal permanently lower trade growth, leading to weaker productivity growth.

Lack of progress—together with some backtracking—on the opening of global markets to trade has added to the slowdown, said the outlook.

“The sharp slowdown in world trade underlines concerns about the robustness of the economy and the difficulties in exiting the low-growth trap,” said OECD chief economist Catherine L. Mann. “While weak demand is surely playing a role in the trade slowdown, a lack of political support for trade policies whose benefits could be widely shared is of deep concern.”

She added that monetary policy is becoming over-burdened and urged countries to “implement fiscal and structural policy actions to reduce the over-reliance on central banks and ensure opportunity and prosperity for future generations.”

Growth among the major advanced economies will be subdued. In the United States, where solid consumption and job growth is countered by weak investment, growth is estimated at 1.4% this year and 2.1% in 2017.

Canadian growth is projected at 1.2% this year and 2.3% in 2017.

The euro area is projected to grow by 1.5% in 2016 and by 1.4% in 2017. Germany is forecast to grow by 1.8% in 2016 and 1.5% in 2017, France by 1.3% in both 2016 and 2017, while Italy will see a 0.8% growth rate this year and next.

In the United Kingdom, growth is slowing following the June 23 referendum to leave the European Union. While a strong response from the Bank of England has helped stabilize markets, uncertainty remains extremely high and risks are clearly on the downside. In this environment, the UK is projected to grow by 1.8% in 2016 and 1%i n 2017, well below the pace in recent years.

Growth in Japan will remain weak and uneven, at 0.6% in 2016 and 0.7% in 2017, with the appreciation of the yen and weak Asian trade weighing on exports.

Growth in the major emerging market economies has slowed compared with recent years and will pick up only slowly in 2017, driven by an easing of the recessions in Brazil, Russia, and other commodity producers.

China’s slowing growth has led to notably weak trade growth in Asia. The country is expected to continue facing challenges as it rebalances its economy from manufacturing-led demand toward consumption and services. Chinese growth is forecast at 6.5% in 2016 and 6.2% in 2017.

For other Asian economies, these weak trade developments have been often offset by strong domestic demand growth supported by credit expansion. India will continue to grow robustly, by 7.4% in 2016 and 7.5% in 2017, boosted by the large increase in public sector wages. Growth may surprise on the upside in 2017 due to the recent passing of key structural reforms, particularly the goods and services tax.

Despite some improvements, Brazil’s economy continues to experience a deep recession, and is expected to shrink by 3.3% this year and a further 0.3% in 2017.

The outlook is subject to significant risks, said OECD. Financial instability risks are rising, including from exceptionally low interest rates and their effects on financial assets and real estate prices. Many emerging market economies face high private-debt burdens and currency mismatches, and remain vulnerable to capital outflows as well as weaker-than-expected growth.

On the upside, the economic recovery could gain more traction, especially if a stronger policy response takes place, for example via a collective fiscal stimulus in advanced economies. However, the difficulties of agreeing on effective responses to policy challenges and growing political tensions in many countries are significant downside tail risks for the global economy.

Photo: Flickr user “Ronnie Macdonald”