With Central Banks out of ammo, governments urged to ready stimulus for next downturn
OECD warns that countries need to prepare plans for a synchronized spending boost to fight a slowdown, but trade tensions could make that difficult
Governments around the world must prepare spending plans they can roll out quickly and in concert should the global economy slow sharply, given that central banks have largely run out of ammunition to fight a slowdown, the Organization for Economic Cooperation and Development said.
However, tensions among the world’s largest economies over trade and other issues could make such fiscal coordination particularly difficult.
The OECD still expects the global economy to experience a soft landing over the coming years, but warned Wednesday of a growing risk that higher barriers to trade, capital outflows from developing economies, and higher oil prices could push it off track.
Central banks did most of the heavy lifting in steering the global economy out of the sharp slowdown that accompanied the financial crisis. But they are largely out of ammunition, the OECD said. Policy interest rates are already negative across much of Europe and Japan, meaning banks have to pay central banks to park their money with them, while central banks’ balance sheets have been swollen by purchases of government bonds and other securities.
With central banks sidelined, it would be down to other parts of governments to provide the stimulus needed to support growth in a future crisis.
“You can’t put too much of a burden on the shoulders of central bankers,” said Laurence Boone, the OECD’s chief economist, in an interview. “The fiscal authorities should do their job.”
The OECD advises its member governments—which include the U.S.—on economic policy, although they don’t always listen.
Governments increased spending as an immediate response to the 2008 financial crisis, but central bankers quickly took the lead in efforts to turn the global economy around, often working closely together.
One big question mark hanging over the OECD’s plan is whether governments that have increasingly been at odds over trade, efforts to tackle climate change and other issues could set their differences aside to coordinate a fiscal stimulus.
“Look, things could get worse, and in that case you better prepare to work together,” Ms. Boone said. “What we’re trying to say is, be prepared to talk, and the quicker you talk, the better.”
In new forecasts published Wednesday, the OECD said global economic growth has likely reached a peak of 3.7% this year, and is expected to slow in 2019 and 2020 to 3.5%. In September, it forecast global growth of 3.7% in 2019.
The OECD left its growth forecasts for the U.S. unchanged at 2.9% in 2018 and 2.7% in 2019, and sees a slowdown to 2.1% in 2020 as the impact of tax cuts and government-spending increases fade and the Federal Reserve’s rate rises start to bite.
The organization lowered its growth forecasts for the eurozone, Japan and China this year and next, and sees growth slowing in those areas during 2020.
However, a number of headwinds could weaken that outlook significantly. The OECD said expanded tariffs on U.S.-China trade, faster outflows of capital from developing economies and higher oil prices could together reduce global growth to less than 3% by 2020, even approaching 2.5% annualized growth if business investment weakened sharply in response to greater uncertainty.
To avert such a slowdown, governments would get greater traction if they acted in sync to boost spending, the OECD said, partly because such a show of common purpose would help restore lost business confidence.
The research body said governments should start preparing those spending plans now so as to be able to act quickly should they be needed.
“If they are well prepared, they can act immediately,” Ms. Boone said.