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

6 March 2019

Laurence Boone

OECD Chief Economist

OECD INTERIM ECONOMIC OUTLOOK

Global growth weakening as some risks materialise

http://www.oecd.org/eco/outlook/economic-outlook/ ECOSCOPE blog: oecdecoscope.wordpress.com

Key messages

2

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

1.0 1.5 2.0 2.5 3.0 3.5 2016 2017 Q4 2018 % y-o-y United States Euro area 2.5 3.0 3.5 4.0 4.5 2016 2017 2018Q4 % q-o-q a.r. y-o-y

Global growth is slowing with further signs of decoupling

3

GDP growth is more dispersed World GDP growth has started to slow

Note: LHS: Global growth in PPP terms. GDP figures for the fourth quarter of 2018 are based on available national accounts data plus estimates for Argentina, Australia, Russia, and Turkey. Source: OECD Economic Outlook database.

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 Germany 1.4 0.7 1.1 India1 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

Real GDP growth revised down

4

OECD Interim Economic Outlook Projections

Year-on-year, %. Arrows indicate the direction of revisions since November 2018.

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.

• 1. Fiscal years starting in April.

5

Euro area export volume growth

Trade growth continues to decelerate

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.

New export orders

Manufacturing

• 1

1 2 3 4 5 6 7 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Dec-18 Intra-EA Extra-EA % y-o-y 3-month moving average 85 90 95 100 105 110 115 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Dec-18 China Euro area East Asia Index 2015-19 average = 100 Feb-19

6

Note: LHS panel: Data normalised over the 2014-2018 period; PPP-weighted aggregates of the OECD countries. Source: OECD Main Economic Indicators database; Markit; and OECD calculations.

Trade tensions and policy uncertainty take a toll on confidence and hiring intentions

Confidence in OECD countries

• 2.5
• 2.0
• 1.5
• 1.0
• 0.5

0.0 0.5 1.0 1.5 2.0 2.5 2014 2015 2016 2017 2018 2019 Normalised Business confidence Consumer confidence 92 94 96 98 100 102 104 106 108 2014 2015 2016 2017 2018 2019 United States Euro area United Kingdom Index 100 = 2014-2019 average 2014-2019 average

Firms’ hiring intentions

PMI for employment

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

7

• 0.6
• 0.5
• 0.4
• 0.3
• 0.2
• 0.1

0.0 United States Euro area Germany Japan Commodity exporters East Asia World % Trade Uncertainty

A slowdown in China would weigh on growth across the world

8

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, Hong Kong (China), Korea, Singapore, Vietnam and other East Asian countries. Regions are weighted using purchasing power parities. Source: OECD calculations.

GDP growth impact of a negative demand shock of 2% pts in China

%, difference from baseline in the first year

9

10-year government bond yield

Note: RHS: Credit growth of loans adjusted for sales and securitisation, non-financial corporations. Source: Thomson Reuters; and OECD calculations.

Slower credit growth may weaken the euro area further

Credit growth

• 12.5
• 10.0
• 7.5
• 5.0
• 2.5

0.0 2.5 5.0 7.5 2010 2012 2014 2016 2018 Italy Germany France Spain % y-o-y 2019

Sovereign bond yields

Bank credit to non-financial corporations

• 1

1 2 3 4 5 6 7 8 2010 2012 2014 2016 2018 Germany France Italy Spain % 2019

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.

The UK economy has been weakening since the Brexit referendum

Real GDP loss since the 2016 referendum

Investment has declined

99 100 101 102 103 104 105 106 107 108 109 2016 2017 2018 United Kingdom OECD Index 2016Q2 = 100 99 100 101 102 103 104 105 106 2016 2017 2018 Germany, France and the United States United Kingdom: Actual United Kingdom: Pre-referendum OECD projections 1.7% 0.7% Index 2016Q2 = 100

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.

A combination of these risks could further weaken euro area growth

Bilateral share of goods exports

2017 20 40 60 80 100 10 20 30 40 50 United Kingdom Italy Germany China Total exports in % of GDP (rhs) % of total exports % of GDP

12

Pressure on EMEs has eased but vulnerabilities persist

EME sovereign bond yield spreads have declined Record level of corporate bond repayments ahead

Emerging market economies

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. 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.

10 20 30 40 50 200 400 600 800 1000 1200 1400 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 Due in year 3 Due in year 2 Due in year 1 Due within next 3 years (rhs) USD billion % of outstanding 2 3 4 5 6 7 8 9 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Turkey Argentina Global EMEs % pts 2 3 4 5 6 7 8 9 2 3 4 5 6 7 8 9 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Turkey Argentina Global EMEs % pts % pts Mar-19

GOVERNMENTS SHOULD COOPERATE TO REDUCE RISKS

13

14

Source: Thomson Reuters; and OECD calculations.

Interest rates are set to stay low for longer

Expected overnight interest rates for end-2019

Market expectations

10-year government bond yields

• 0.5

0.0 0.5 1.0 1.5 2.0 2.5 3.0 2017 2018 2019 Euro area United Kingdom Japan United States %, 15-day m.a. 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 2017 2018 2019 United States Germany United Kingdom Euro area %

15

Potential GDP per capita growth and public debt

Note: Public debt is based on Maastricht criteria. Source: OECD Economic Outlook database; and OECD calculations.

Public debt levels vary between countries but trend growth is low in most euro area countries

Germany France Italy Austria Belgium Finland Greece Ireland Netherlands Portugal Spain Latvia Slovak Rep. Slovenia 20 40 60 80 100 120 140 160 180 1 2 3 4 5 Public Debt in 2017, % of GDP Potential GDP per capita growth in 2017-2019, % average annual change More fiscal space More scope for structural reforms

0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 2019 2020 2021 long-run %

16

Impact of structural reforms and a coordinated 3-year fiscal stimulus in countries with fiscal space in the euro area

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 Republic, Slovenia, Estonia, Latvia, and Lithuania. Source: OECD calculations.

Euro area: coordinate fiscal support and structural reforms to avoid a downturn and spur wages

GDP

Real, difference from baseline, per cent

Wages per employee

Real, difference from baseline, per cent 0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 2019 2020 2021 long-run % Fiscal stimulus in countries with fiscal space Structural reforms only

Key messages

17

Growth is weakening particularly in Europe

• Uncertainty is weighing on confidence, trade, investment and employment prospects
• EU trade has slowed sharply, contributing to weaker-than-expected growth in Europe

Vulnerabilities in China, Europe and financial markets could derail the global economy

• A sharper slowdown in China would weigh on global growth and could weaken growth

in Europe further

• Political uncertainty in Europe is high and could weaken credit growth
• Challenges persist in financial markets and some EMEs

Governments should cooperate to reduce risks

• Intensify multilateral dialogue globally and in Europe to reduce policy uncertainty
• Central banks should remain supportive but cannot and should not act alone
• Euro area governments should coordinate a fiscal and structural push