OECD INTERIM ECONOMIC OUTLOOK Stronger growth remains elusive: Urgent policy response is needed Paris, 18 February 2016 11h00 Catherine L. Mann OECD Chief Economist www.oecd.org/economy/economicoutlook.htm ECOSCOPE blog: oecdecoscope.wordpress.com/
Key messages Stronger global growth remains elusive • Weak trade, investment, and commodity prices • Disappointing incoming data on demand conditions • Low inflation and poor wage growth Financial instability risks are substantial • Steep declines in global equity markets • Volatile capital flows and high debt exposures in EMEs Collective policy action is urgent • Maintain accommodative monetary policy • Focus supportive fiscal policies on investment-led spending • Revive pace of productivity- and growth-enhancing structural reforms 2
Global growth forecasts: Revised Down GDP forecasts Global GDP growth in 2016 projected to be no higher than 2015 Growth barely recovering in advanced countries, Forecast downgrades since November slowing in many EMEs Global growth revised down by 0.3% pts in both 2016 and in 2017 3 Source: OECD Economic Outlook databases; and OECD calculations.
Interim Economic Outlook Forecasts Real GDP growth (%) 1 2015 2016 2017 difference from difference from February 2016 February 2016 November November Column2 Column3 Interim Interim Economic Economic Projections Projections2 Outlook 2 Outlook 2 2 World 3.0 3.0 -0.3 3.3 -0.3 United States 2.4 2.0 -0.5 2.2 -0.2 Euro area 1.5 1.4 -0.4 1.7 -0.2 Germany 1.4 1.3 -0.5 1.7 -0.3 France 1.1 1.2 -0.1 1.5 -0.1 Italy 0.6 1.0 -0.4 1.4 0.0 Japan 0.4 0.8 -0.2 0.6 0.1 Canada 1.2 1.4 -0.6 2.2 -0.1 United Kingdom 2.2 2.1 -0.3 2.0 -0.3 China 6.9 6.5 0.0 6.2 0.0 India 3 7.4 7.4 0.1 7.3 -0.1 Brazil -3.8 -4.0 -2.8 0.0 -1.8 Rest of the World 2.1 2.5 -0.3 3.1 -0.2 1. Year-on-year. GDP at market prices adjusted for working days. 2. Difference in percentage points based on rounded figures for both the current and November 2015 Economic Outlook forecasts. 4 3. Fiscal years starting in April.
Global demand cannot be sustained solely by the US recovery Contributions to quarterly US GDP growth Consumption growth has been steady, but investment and exports have weakened Appreciation of the US dollar has contributed to fall in exports in late 2015 5 Source: OECD Economic Outlook Database
Rebalancing in China and financial volatility are dragging on global markets Composition of growth in China Growth is slowing and rebalancing from manufacturing to services, but with mounting financial vulnerabilities Currency depreciation and declining reserves External financial management is proving to be challenging Note: Manufacturing (secondary) includes construction. 6 Source: Chinese National Bureau of Statistics; People’s Bank of China; and Thomson Reuters .
Commodity prices have been falling Commodity prices The sharp fall in oil and commodity prices reflects supply running ahead of demand Lower oil prices should help consumers, but Baltic Dry Index have depressed investment 7 Source: OECD Economic Outlook database; and Thomson Reuters.
Significant slowdown in global trade growth Global trade volumes and GDP Note: World trade is goods plus services trade volumes. World GDP growth is measured at purchasing power parities. 8 Source: OECD Economic Outlook database.
Sluggish demand leads to low inflation and weak wage growth Core inflation Compensation per employee Note: Latest month available. Core inflation is for consumer prices excluding food and energy. The private consumption deflator is used for the United States. 9 Source: OECD Economic Outlook databases.
Financial markets are reassessing prospects, triggering lower and more volatile equity prices Share prices in major markets Share prices have fallen sharply since December Volatility Index (VIX) Market volatility worldwide has increased 10 Source: Thomson Reuters.
Risks of financial instability are substantial, particularly from emerging markets Nominal effective exchange rates Exchange rates have depreciated sharply and capital flows have been volatile EMEs sovereign bond spreads EMBI Composite, basis points Borrowing costs are rising 11 Source: OECD Exchange Rate database; and Thomson Reuters.
Some EMEs are vulnerable to exchange rate shocks and high domestic debt Credit to corporations has increased External liabilities are significant Percent of GDP Percent of GDP, 2014 or latest available Note: Credit to non-financial corporates. For South Africa, 2008 rather than 2007. 12 Source: OECD November 2015 Economic Outlook database; BIS; and OECD calculations.
A stronger collective policy response is needed 13
Monetary policy working alone is not sufficient to support global demand Central bank balance sheets The European Central Bank and Bank of Japan have announced new measures US federal funds rate expectations US monetary policy is expected to tighten at a slower pace Note: Policy rate shows the top of the target range. 14 1. Future overnight market interest rates derived from overnight index swap rates. Source: Thomson Reuters; Bloomberg; and OECD calculations.
Fiscal policy is contractionary in many major economies, although not in China Change in the underlying primary balance 2014-16 While the pace of Tighter consolidation has policy eased, drag on global demand continues Fiscal stimulus in China is supporting growth Note: For China, change in the general government balance as a per cent of GDP from 2014-15. 15 Source: OECD Economic Outlook databases.
Interest rates are very low, providing an opportunity to borrow and invest 2-year government bond yields Government bond yields have fallen and some are now negative over short horizons Source: Thomson Reuters. 16
Collective fiscal action promotes growth and fiscal sustainability 1 st year effects of a ½ per cent of GDP public investment stimulus by all OECD economies Change from baseline Collective action should focus on public investment and pro-growth structural policies Note: Simulation using the NiGEM model, based on a two-year increase in the level of government investment equivalent to ½ per cent of GDP per annum in all OECD countries. The euro area figures are a weighted average of Germany, France and Italy. 17 Source: OECD calculations.
The pace of structural reforms shows insufficient ambition Responsiveness to OECD Going for Growth recommendations Share of recommendations implemented Note: Calculated for all countries for which recommendations are available. Emerging market economies include Brazil, Chile, China, Columbia, India, Indonesia, Mexico, Russia, Turkey and South Africa; Mexico and Turkey only prior to 2011. Advanced includes the rest of the OECD. 18 Source: OECD Going for Growth 2016 (forthcoming).
In the EU, much more progress is needed to boost investment and productivity Juncker investment plan disappoints Deleveraging is needed for financial health Household and non-financial corporate debt Harmonising and reducing Deleveraging proceeded faster and regulation in the EU could raise FDI, further in the US than the euro area and boost trade intensity by 10-25% 19 Source: European Commission; Eurostat; and Fournier et al. Source: Eurostat; OECD Main Statistical Database; and OECD National (2015). Accounts Database.
The GDP impact of uncertainties in Europe could be great Change in GDP after two years Per cent Note: The investment decline scenario reduces the growth rate of business investment in all European Economic Area countries by 2½ percentage points in both 2016 and 2017 due to higher policy uncertainty and expectations of weaker medium-term growth. The shock is equivalent to around one fifth of the policy uncertainty shock of 2011. The second scenario adds a 50 basis point increase in equity and investment risk premia in all EU countries, returning approximately one sixth of the financial conditions prevailing at the height of the euro area crisis. 20 Source: OECD calculations.
Summary Global growth flat-lined due to continued subdued global trade, investment and wage growth in advanced economies Emerging market economies’ growth models have been exposed by the slowdown in trade and falling commodity prices Despite the boost from low oil prices and interest rates, the most likely scenario is weak global growth in 2016 and 2017 Substantial downside risks centre on financial market volatility and emerging market debt Collective fiscal action and more ambition on structural policies would raise global growth and reduce financial risks 21
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