Global recovery set to stall this year, says OECD

Governments to blame for ‘low-growth’ trap

THE GLOBAL economy was slipping into a self-fulfilling “low-growth trap” where ultraloose monetary policy risks were doing more harm than good, the Organisation for Economic Co-operation and Development (OECD) warned.

In a highly critical editorial in the OECD’s latest economic outlook, rich world governments bear the brunt of the blame for failing to revive demand and failing to overhaul their economies in the wake of the 2008 financial crisis.

According to the Parisbased group – which advises 34 member countries – too much of the burden of lifting growth has been left to central banks. After pushing interest rates below zero and pumping money into their economies through asset purchases, they are starting to see diminishing returns and their actions could generate financial market volatility.

Dismal outlook

“Overall a rather mediocre, a rather dismal outlook,” OECD secretary-general Angel Gurria said. “Trade is growing at 2 percent to 3 percent; it should be growing at 7 percent.”

The remarks underline the lacklustre growth as many emerging markets struggle with a slump in commodity prices and rich economies such as Europe and the US fail to return to the sort of performance they typically had before 2008.

“Monetary policy has been the main tool, used alone for too long,” OECD chief economist Catherine Mann said in the report released yesterday.

“In trying to revive economic growth alone, with little help from fiscal or structural policies, the balance of benefits-to-risks is tipping.”

Mann also said “negative feedback loops are at work”. Lack of demand, global uncertainties and slow reform progress were deterring investment, while trade growth remained too weak, she said.

“Monetary policy cannot revive near- and long-term growth by itself, and distortions are increasing,” the OECD said. Ultra-low and negative rates had stressed bank profitability and created financial strains for pension funds and insurers, while becoming “less potent” in stimulating consumption, it said.

The worldwide recovery is set to stall this year, with output growing 3 percent. That forecast is unchanged from the organisation’s February 18 estimate and it would match the pace seen last year. Expansion should accelerate to 3.3 percent next year, the OECD said.

“Fiscal policy must be deployed more extensively and can take advantage of the environment created by monetary policy,” Mann said. “Governments today can lock in very low interest rates for very long maturities to effectively open up fiscal space.”

The OECD’s message echoes the mantra of European Central Bank (ECB) president Mario Draghi, who has long called for governments to do more to stimulate growth. After the ECB’s April policy meeting, he said, “In order to reap the full benefits from our monetary policy measures, other policy areas must contribute much more decisively.”

While the OECD left its global growth forecast unchanged, it cut its 2016 projections for growth in the US and Japan, while lifting the euro area. US gross domestic product is expected to expand 1.8 percent this year instead of the 2 percent predicted in February. Next year’s forecast is unchanged at 2.2 percent.

In the US, “growth hit a soft patch at the turn of the year”, the OECD said. The Federal Reserve’s gradual policy would leave interest rates “supportive throughout the projection, which is broadly appropriate” given weakening inflationary pressures and ongoing weakness in global demand.

Slowdown ahead

This year’s euro-area growth was revised up to 1.6 percent from 1.4 percent, while next year’s estimate was maintained at 1.7 percent. The OECD kept its China forecasts at 6.5 percent this year and 6.2 percent next year.

Still, data yesterday signaled a slowdown ahead in the 19-nation currency block, with a purchasing managers index for euro-area manufacturing slipping to 51.5 in May from 51.7 a month earlier.

“The longer the global economy remains in the low-growth trap, the more difficult it will be to break the negative feedback loops, revive market forces and boost economies to the high-growth path,” Mann warned. “As it is, a negative shock could tip the world back into another deep downturn.”

The worldwide recovery is set to stall this year, with output growing 3 percent.