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OECD Paints a Bleaker World Economic Picture
The 36-member Organization for Economic Cooperation and Development is joining the World Bank and the World Trade Organization in predicting that the long-running global economic expansion, which got underway in 2009, will ease in 2019 and slow further in 2020, with almost all G20 economies slowing more quickly than had been anticipated in the latter half of 2018.
The OECD, in a prepared release, said that “high policy uncertainty, ongoing trade tensions and a further erosion of business and consumer confidence” are all contributing to the slowdown. That could be read as a semaphore to the administration of US President Donald Trump that his policy zigzags and tariff wars are affecting the global economy.
Trade growth, a key artery in the global economy, has also slowed markedly, to around 4 percent in 2018 from 5.25 percent in 2017, “with trade restrictions having adverse effects on confidence and investment plans around the world.” In Europe, trade growth has actually stalled, reflecting a slowdown in both external and internal demand
The current outlook is for the weakest pace since the middle of 2016, “in part reflecting the deep recessions occurring in some emerging-market economies and widespread weakness in industrial sectors.” The big concern is that confidence indicators are slowing markedly in the OECD countries, especially in the euro area and the United Kingdom, where growth has disappointed, and in China, where concerns linger about the extent of the slowdown.
In Washington, Trump has continued to insist that his economy is the greatest in the history of the country and that his trade wars are paying off, both arguments that economists don’t agree with. Both the World Bank and the WTO earlier predicted slowing growth.
Certainly, the picture is far from black, or even gray. Global growth is projected to ease to a still-healthy 3.3 percent in 2019 and to 3.4 percent in 2020, although “with downside risks continuing to build,” according to the OECD projection, which found global trade growth slowing sharply and with measures of new orders declining in many countries, primarily because of trade restrictions introduced last year which are a drag on growth, investment and living standards, particularly for low-income households.
However, labor markets remain resilient and wage growth is actually picking up, supporting household incomes and spending and painting a relatively benign picture for the administrations in power across the globe.
China, however, faces problems with growth officially projected to moderate gradually to 6 percent by 2020, a figure met with some doubt by political analysts who believe the economy is starting to slip badly, presenting problems for the Chinese Communist Party. The National People’s Conference over the weekend pushed through RMB 2 trillion worth of corporate tax cuts, a 3 percent cut in the manufacturing value-added tax and a 3-4 percent cut in the corporate social in an attempt to boost capital expenditure as well as other policy-easing signals.
Additional cuts in the bank reserve requirement are expected although the currency is liable to stay stable against the US dollar and hope remains for an agreement limiting tariffs in President Trump’s trade war. As the OECD warns, “a sharper slowdown in China would hit growth and trade prospects around the world.”
The Asian economies largely will outperform, with Indonesia expecting 5.2 percent growth and India expecting a stellar 7.0 percent.
The report, however, describes “substantial policy uncertainty” in Europe, including over Brexit, which, if it isn’t played right, “would raise the costs for European economies substantially. The major economies – Germany (07 percent expansion), France (1.3 percent), Italy (slipping into negative territory at -0.2 percent) and the UK (0.8 percent, which could be optimistic given Brexit) and Japan (0.8 percent growth) all face lackluster performance. The Germans are bracing for the possibility that President Trump, once his attention shifts from China, will introduce major tariffs on German cars imported into the United States.
Central banks are putting the brakes on “monetary policy normalization” – interest-rate increases with the US Federal Reserve signaling that rate increases are probably on hold, although, as the OECD says, “this risks a further build-up of financial vulnerabilities.”
Lower oil prices and improved financial conditions offer scope to reduce interest rates in emerging market economies although “greater structural reform ambition is required in all economies to enhance medium-term living standards and improve opportunities for all.
In too many OECD countries, “business investment prospects have also weakened, reflecting declining confidence and continued policy uncertainty.”