Intensifying trade conflicts have sent global growth momentum tumbling toward lows last seen during the financial crisis, and governments are not doing enough to prevent long-term damage, the Organisation for Economic Cooperation and Development (OECD) has said in its latest outlook.
The Paris-based organisation cut almost all economic forecasts it made just four months ago, as protectionist policies take an increasing toll on confidence and investment, and risks continue to mount on financial markets. It sees world growth at a mere 2.9 per cent this year.
The OECD lowered its growth forecasts for most major economies
“Our fear is that we are entering an era where growth is stuck at a very low level,” OECD Chief Economist, Laurence Boone, said: “Governments should absolutely take advantage of low rates to invest in the future now so that this sluggish growth doesn’t become the new normal.”
The OECD is the latest institution sounding the alarm over the state of the global economy. In the past two weeks, the Federal Reserve, the European Central Bank, the People’s Bank of China and numerous of their peers have eased policy to shore up demand, urging governments at the same time that fiscal stimulus will be needed to ensure their efforts won’t be futile.
Manufacturing has borne the brunt of the economic crisis brought about by a tit-for-tat trade war between the U.S. and China. The services sector has proved unusually resilient to the malaise so far, but the OECD warned that “persistent weakness” in industry will weigh on the labor market, household incomes and spending.
Additional risks stem from a sharper slowdown in China and a no-deal Brexit that could push the U.K. into a recession and would considerably reduce growth in Europe, according to the report.
“Trump’s brinkmanship on trade with China has left consumers, businesses and financial markets on edge. Not knowing whether the next Presidential tweet will ease or exacerbate tensions makes for an environment of extreme uncertainty, pushing businesses to turn cautious on investment and hiring, and households to swing from spending to saving.”
The OECD said: “collective effort is urgent,” and the effectiveness of monetary policy could be enhanced by “stronger fiscal and structural policy support.”
It’s a point central bankers have made for months, and their requests are getting more intense. Following the ECB’s latest monetary stimulus push, President Mario Draghi said it’s “high time” for fiscal policy to take charge, signaling there’s not much more his institution can do.
“The takeaway for the euro zone today is not to rely on monetary policy to do the job alone,” Boone said.
“Start investing to do the structural reforms that need to be done for more sustainable growth, and do it now,” he added.
