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Global growth could stagnate at 3% for next 2 years — OECD

Trade conflict and weak business investment will dampen world economic outlook.

Trade conflict, weak business investment and persistent political uncertainty continue to dampen the outlook on the world economy while raising the risk of long-term stagnation, the Organisation for Economic Co-operation and Development (OECD) says.

“The outlook for the global economy is worrying, and it should be worrying policymakers,” OECD Chief Economist Laurence Boone said in a YouTube video providing a brief synopsis of the latest OECD Economic Outlook.

OECD Chief Economist Laurence Boone (Photo: rte.ie)

“Trade is weak, confidence is low and businesses are reluctant to invest. We expect world economic growth to fall to 2.9 per cent this year — its weakest annual rate since the financial crisis. Over the next two years, growth is unlikely to climb above three per cent. Unless bold action is taken by governments now, sluggish activity will become entrenched, threatening jobs and living standards for years to come,” she continued.

Advanced and emerging economies at risk

Breaking down the figures by country, a press release from the OECD outlined that growth in the US is forecast to slow to 2.0 per cent in 2020 and 2021. In the euro area and Japan, growth is expected at around 1.0 per cent, while the deceleration in China’s expansion is expected to reach 5.5 per cent in 2021, compared with 6.6 per cent last year.

“It would be a mistake to consider these changes as temporary factors that can be addressed with monetary or fiscal policy: they are structural.”

– OECD Chief Economist Laurence Boone

Further, the OECD clarified that the slowdown impacts both advanced and emerging market economies; however, its severity varies based on the importance of trade to individual countries.

Boone also noted that the trade war between the US and China has resulted in the deterioration of imports and exports globally, while uncertainty over the United Kingdom’s departure from the European Union — known as Brexit — is discouraging business investment.

Growth in the US will slow to 2.0 per cent in 2020 and 2021. (Photo: Shutterstock)

Measures to counter a global slowdown

While presenting the OECD Economic Outlook in Paris, the chief economist warned, “It would be a mistake to consider these changes as temporary factors that can be addressed with monetary or fiscal policy: they are structural. Without coordination for trade and global taxation, clear policy directions for the energy transition, uncertainty will continue to loom large and damage growth prospects.”

As a result, the OECD has called on governments to take “Bold action … to address both the high levels of uncertainty facing businesses as well as the fundamental changes taking place in the global economy”.

“Digitalisation is transforming business models while climate and demographic changes are already disrupting existing patterns of activity. China, meanwhile, is rebalancing away from a reliance on exports and manufacturing towards consumption and services.”

– Organisation for Economic Co-operation and Development

In addition, the organisation is urging governments to work together in order to boost investment and establish fair international rules on taxation and trade.

Whereas the current state of the global economy is largely due to policy decisions, the OECD also listed digitalisation and climate change, among other things, as factors exacerbating the slowdown.

The OECD listed digitalisation and climate change as factors worsening the slowdown.

“Digitalisation is transforming business models while climate and demographic changes are already disrupting existing patterns of activity. China, meanwhile, is rebalancing away from a reliance on exports and manufacturing towards consumption and services,” the OECD noted.

Aggregate investment growth in the G20 countries, excluding China, slowed from annual rate of 5.0 per cent at the start of 2018 to only 1.0 per cent in the first half of 2019, the outlook indicates. Global trade volume growth of goods and services is estimated to have slowed to 1.0 this year — its lowest rate since the Great Recession. Although a modest uptick is projected, it is expected to remain weak.

“We can escape long-term stagnation by combining structural reforms with targeted spending and tax policies at lower interest rates and raise investment confidence.”

– Boone

The OECD says it is keen on strengthening international cooperation between countries, in particular, to reach an agreement on transparent and fair international taxation and trade rules.

Added to that, the cooperative organisation is looking at how dedicated public investment funds can be geared toward meeting long-term objectives, such as ensuring society benefits fully from advances in digital technology or facilitating transition to a low-carbon future.

“We can escape long-term stagnation by combining structural reforms with targeted spending and tax policies at lower interest rates and raise investment confidence,” Boone recommends.