ECONOMIC OUTLOOK Stronger growth remains elusive: Urgent policy - - PowerPoint PPT Presentation

Paris, 18 February 2016

11h00

Catherine L. Mann

OECD Chief Economist

OECD INTERIM ECONOMIC OUTLOOK Stronger growth remains elusive: Urgent policy response is needed

www.oecd.org/economy/economicoutlook.htm ECOSCOPE blog: oecdecoscope.wordpress.com/

Key messages

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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

Global growth forecasts: Revised Down

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Global GDP growth in 2016 projected to be no higher than 2015 Global growth revised down by 0.3% pts in both 2016 and in 2017 Growth barely recovering in advanced countries, slowing in many EMEs GDP forecasts Forecast downgrades since November

Source: OECD Economic Outlook databases; and OECD calculations.

Interim Economic Outlook Forecasts

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Real GDP growth (%)1

• 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.

• 3. Fiscal years starting in April.

2015 Column2 Column3 February 2016 Interim Projections difference from November Economic Outlook2 February 2016 Interim Projections2 difference from November Economic Outlook22 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 India3 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

2016 2017

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Global demand cannot be sustained solely by the US recovery

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

Source: OECD Economic Outlook Database

Contributions to quarterly US GDP growth

Rebalancing in China and financial volatility are dragging on global markets

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Composition of growth in China Growth is slowing and rebalancing from manufacturing to services, but with mounting financial vulnerabilities External financial management is proving to be challenging

Note: Manufacturing (secondary) includes construction. Source: Chinese National Bureau of Statistics; People’s Bank of China; and Thomson Reuters.

Currency depreciation and declining reserves

Commodity prices have been falling

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The sharp fall in oil and commodity prices reflects supply running ahead of demand Lower oil prices should help consumers, but have depressed investment

Source: OECD Economic Outlook database; and Thomson Reuters.

Commodity prices Baltic Dry Index

Significant slowdown in global trade growth

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Note: World trade is goods plus services trade volumes. World GDP growth is measured at purchasing power parities. Source: OECD Economic Outlook database.

Global trade volumes and GDP

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Sluggish demand leads to low inflation and weak wage growth

Note: Latest month available. Core inflation is for consumer prices excluding food and energy. The private consumption deflator is used for the United States. Source: OECD Economic Outlook databases.

Core inflation Compensation per employee

Financial markets are reassessing prospects, triggering lower and more volatile equity prices

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Share prices in major markets Share prices have fallen sharply since December Market volatility worldwide has increased Volatility Index (VIX)

Source: Thomson Reuters.

Risks of financial instability are substantial, particularly from emerging markets

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Nominal effective exchange rates Exchange rates have depreciated sharply and capital flows have been volatile Borrowing costs are rising

Source: OECD Exchange Rate database; and Thomson Reuters.

EMEs sovereign bond spreads

EMBI Composite, basis points

Some EMEs are vulnerable to exchange rate shocks and high domestic debt

12

Credit to corporations has increased

Percent of GDP

External liabilities are significant

Percent of GDP, 2014 or latest available

Note: Credit to non-financial corporates. For South Africa, 2008 rather than 2007. Source: OECD November 2015 Economic Outlook database; BIS; and OECD calculations.

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A stronger collective policy response is needed

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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 monetary policy is expected to tighten at a slower pace

Note: Policy rate shows the top of the target range.

• 1. Future overnight market interest rates derived from overnight index swap rates.

Source: Thomson Reuters; Bloomberg; and OECD calculations.

US federal funds rate expectations

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Fiscal policy is contractionary in many major economies, although not in China

While the pace of consolidation has 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. Source: OECD Economic Outlook databases.

Change in the underlying primary balance

2014-16

Tighter policy

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Interest rates are very low, providing an

• pportunity to borrow and invest

Government bond yields have fallen and some are now negative over short horizons

Source: Thomson Reuters.

2-year government bond yields

Collective fiscal action promotes growth and fiscal sustainability

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1st year effects of a ½ per cent of GDP public investment stimulus by all OECD economies

Change from baseline

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. Source: OECD calculations.

Collective action should focus on public investment and pro-growth structural policies

The pace of structural reforms shows insufficient ambition

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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. Source: OECD Going for Growth 2016 (forthcoming).

Responsiveness to OECD Going for Growth recommendations

Share of recommendations implemented

Deleveraging proceeded faster and further in the US than the euro area

In the EU, much more progress is needed to boost investment and productivity

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Source: European Commission; Eurostat; and Fournier et al. (2015). Source: Eurostat; OECD Main Statistical Database; and OECD National Accounts Database.

Deleveraging is needed for financial health

Household and non-financial corporate debt

Harmonising and reducing regulation in the EU could raise FDI, and boost trade intensity by 10-25%

Juncker investment plan disappoints

The GDP impact of uncertainties in Europe could be great

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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. Source: OECD calculations.

Change in GDP after two years

Per cent

Summary

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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