Global growth weakening as some risks materialise 6 March 2019 - PowerPoint PPT Presentation

OECD INTERIM ECONOMIC OUTLOOK Global growth weakening as some risks materialise 6 March 2019 Laurence Boone OECD Chief Economist http://www.oecd.org/eco/outlook/economic-outlook/ ECOSCOPE blog: oecdecoscope.wordpress.com

Key messages Growth is weakening particularly in Europe Vulnerabilities in China, Europe and financial markets could derail the global economy Governments should cooperate to reduce risks 2

Global growth is slowing with further signs of decoupling World GDP growth has started to GDP growth is more dispersed slow % % y-o-y United States Euro area q-o-q a.r. y-o-y 4.5 3.5 3.0 4.0 2.5 3.5 2.0 3.0 1.5 2.5 1.0 2016 2017 2018Q4 2016 2017 Q4 2018 Note: LHS: Global growth in PPP terms. GDP figures for the fourth quarter of 2018 are based on available national accounts data plus 3 estimates for Argentina, Australia, Russia, and Turkey. Source: OECD Economic Outlook database.

Real GDP growth revised down OECD Interim Economic Outlook Projections Year-on-year, %. Arrows indicate the direction of revisions since November 2018. 2018 2019 2020 2018 2019 2020 World 3.6 3.3 3.4 G20 3.8 3.5 3.7 Australia 2.9 2.7 2.5 Argentina -2.5 -1.5 2.3 Canada 1.8 1.5 2.0 Brazil 1.1 1.9 2.4 Euro area 1.8 1.0 1.2 China 6.6 6.2 6.0 India 1 Germany 1.4 0.7 1.1 7.0 7.2 7.3 France 1.5 1.3 1.3 Indonesia 5.2 5.2 5.1 Italy 0.8 -0.2 0.5 Mexico 2.1 2.0 2.3 Japan 0.7 0.8 0.7 Russia 2.3 1.4 1.5 Korea 2.7 2.6 2.6 Saudi Arabia 2.0 2.1 2.0 United Kingdom 1.4 0.8 0.9 South Africa 0.8 1.7 2.0 United States 2.9 2.6 2.2 Turkey 2.9 -1.8 3.2 Note: Difference in percentage points based on rounded figures. Dark red for downward revisions of 0.6 percentage points and more. Dark green and dark orange for, respectively, upward and downward revisions of 0.3 percentage points and more but less than 0.6 percentage points. Light green and light orange for, respectively, upward and downward revisions of less than 0.3 percentage points. The European Union is a full member of the G20, but the G20 aggregate only includes countries that are also members in their own right. 4 1. Fiscal years starting in April.

Trade growth continues to decelerate New export orders Euro area export volume growth Manufacturing Index 2015-19 average = 100 % y-o-y 3-month moving average 115 7 China Euro area East Asia Intra-EA Extra-EA 6 110 5 105 4 100 3 2 95 1 90 0 -1 85 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Dec-18 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Dec-18 Feb-19 5 Note: RHS: East Asia is a PPP-weighted aggregate of Japan, Korea, Malaysia, the Philippines, Thailand, Taiwan and Vietnam. Source: Markit; Eurostat; and OECD calculations.

Trade tensions and policy uncertainty take a toll on confidence and hiring intentions Firms’ hiring intentions Confidence in OECD countries PMI for employment United States Euro area United Kingdom Business confidence Consumer confidence Normalised Index 100 = 2014-2019 average 2.5 108 2.0 106 1.5 104 1.0 102 0.5 0.0 100 2014-2019 average -0.5 98 -1.0 96 -1.5 94 -2.0 -2.5 92 2014 2015 2016 2017 2018 2019 2014 2015 2016 2017 2018 2019 Note: LHS panel: Data normalised over the 2014-2018 period; PPP-weighted aggregates of the OECD countries. 6 Source: OECD Main Economic Indicators database; Markit; and OECD calculations.

VULNERABILITIES IN CHINA, EUROPE AND FINANCIAL MARKETS COULD DERAIL THE GLOBAL ECONOMY 7

A slowdown in China would weigh on growth across the world GDP growth impact of a negative demand shock of 2% pts in China %, difference from baseline in the first year Trade Uncertainty % 0.0 -0.1 -0.2 -0.3 -0.4 -0.5 -0.6 United States Euro area Germany Japan Commodity East Asia World exporters Note: Simulated impact of a decline of 2 percentage points per year in domestic demand growth in China for two years. The uncertainty shock is a 50 basis point increase in investment risk premia in all economies. Policy interest rates are endogenous in all areas. Commodity exporters include Argentina, Australia, Brazil, Chile, Indonesia, Russia, South Africa and the other oil producers. East Asia includes Chinese Taipei, 8 Hong Kong (China), Korea, Singapore, Vietnam and other East Asian countries. Regions are weighted using purchasing power parities. Source: OECD calculations.

Slower credit growth may weaken the euro area further Sovereign bond yields Credit growth 10-year government bond yield Bank credit to non-financial corporations Germany France Italy Spain % Italy Germany France Spain % y-o-y 8 7.5 7 5.0 6 2.5 5 0.0 4 -2.5 3 -5.0 2 -7.5 1 -10.0 0 -1 -12.5 2010 2012 2014 2016 2018 2010 2012 2014 2016 2018 2019 2019 Note: RHS: Credit growth of loans adjusted for sales and securitisation, non-financial corporations. 9 Source: Thomson Reuters; and OECD calculations.

The UK economy has been weakening since the Brexit referendum Investment has declined Real GDP loss since the 2016 referendum Germany, France and the United States United Kingdom OECD United Kingdom: Actual Index 2016Q2 = 100 United Kingdom: Pre-referendum OECD projections 109 Index 2016Q2 = 100 108 106 1.7 % 107 105 106 0.7% 104 105 103 104 103 102 102 101 101 100 100 99 99 2016 2017 2018 2016 2017 2018 10 Note: LHS: The green line is a GDP-weighted average of France, Germany and the United States. Source: OECD Economic Outlook database; and OECD calculations.

A combination of these risks could further weaken euro area growth Bilateral share of goods exports 2017 United Kingdom Italy Germany China Total exports in % of GDP (rhs) % of total exports % of GDP 50 100 40 80 30 60 20 40 10 20 0 0 11 Note: Black triangles represent the share of total goods export in % of GDP. Data as of 2016 for the Netherlands. Source: OECD International Merchandise Trade Statistics database; OECD Economic Outlook database; and OECD calculations.

Pressure on EMEs has eased but vulnerabilities persist Record level of corporate bond repayments EME sovereign bond yield spreads have ahead declined Emerging market economies Turkey Argentina Global EMEs Due in year 3 Due in year 2 Turkey Argentina Global EMEs % pts % pts % pts Due in year 1 Due within next 3 years (rhs) 9 9 9 % of outstanding USD billion 1400 50 8 8 8 1200 40 7 7 7 1000 6 6 6 30 800 5 5 5 600 20 4 4 4 400 10 3 3 3 200 2 2 2 0 0 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Mar-19 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 Note: LHS panel : Global EMEs stands for JP Morgan Emerging Bond Index (EMBI), which measures the yield spread between EMEs’ government bonds denominated in US dollars and US Treasuries. 12 Source: Thomson Reuters; Çelik, S., G. Demirtaş and M. Isaksson (2019), “Corporate Bond Markets in a Time of Unconventional Monetary Policy ”, Paris; and OECD Capital Market Series.

GOVERNMENTS SHOULD COOPERATE TO REDUCE RISKS 13

Interest rates are set to stay low for longer Expected overnight interest rates 10-year government bond yields for end-2019 Market expectations United States Germany Euro area United Kingdom Japan United States % United Kingdom Euro area 3.5 %, 15-day m.a. 3.0 3.0 2.5 2.5 2.0 2.0 1.5 1.5 1.0 1.0 0.5 0.0 0.5 -0.5 0.0 2017 2018 2019 2017 2018 2019 14 Source: Thomson Reuters; and OECD calculations.

Public debt levels vary between countries but trend growth is low in most euro area countries Potential GDP per capita growth and public debt More scope for Public Debt in 2017, structural reforms % of GDP 180 More Greece fiscal 160 space 140 Italy Portugal 120 Belgium France 100 Spain Austria Slovenia 80 Germany Finland Ireland 60 Slovak Rep. Netherlands 40 Latvia 20 0 1 2 3 4 5 Potential GDP per capita growth in 2017-2019, % average annual change Note: Public debt is based on Maastricht criteria. 15 Source: OECD Economic Outlook database; and OECD calculations.

Euro area: coordinate fiscal support and structural reforms to avoid a downturn and spur wages Impact of structural reforms and a coordinated 3-year fiscal stimulus in countries with fiscal space in the euro area GDP Wages per employee Real, difference from baseline, per cent Real, difference from baseline, per cent % % Fiscal stimulus in countries with fiscal space 0.9 0.9 Structural reforms only 0.8 0.8 0.7 0.7 0.6 0.6 0.5 0.5 0.4 0.4 0.3 0.3 0.2 0.2 0.1 0.1 0.0 0.0 2019 2020 2021 long-run 2019 2020 2021 long-run Note: The level of technical progress is gradually raised by 1% by the fifth year in all countries, and countries with fiscal space also increase government investment by 0.5% of GDP for three years. Euro area monetary policy is assumed to be set in a way that takes into account the eventual long-run improvement in output. Countries with fiscal space here include Germany, the Netherlands, Austria, Finland, Ireland, Slovak 16 Republic, Slovenia, Estonia, Latvia, and Lithuania. Source: OECD calculations.