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Greater structural reform ambition required in all economies, says OECD

20th September 2019

By: Simone Liedtke

Creamer Media Social Media Editor & Senior Writer

     

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Economic prospects are weakening for both advanced and emerging economies and global growth runs the risk of being stuck at persistently low levels without firm policy action from governments, the Organisation for Economic Cooperation and Development (OECD) states in its latest ‘Interim Economic Outlook’.

This is as a result of the global economy becoming increasingly fragile and uncertain, with growth slowing and downside risks continuing to mount.

Additionally, escalating trade conflicts are taking an increasing toll on confidence and investment, adding to policy uncertainty, aggravating risks in financial markets and endangering already weak growth prospects across the globe.

The OECD projects that the global economy will grow by only 2.9% in 2019, and 3% in 2020, making it the weakest yearly growth rates since the 2008/9 financial crisis, with downside risks continuing to mount.

Gross domestic product (GDP) growth in the US is projected to moderate at around 2% in 2020 as the support from fiscal easing slowly fades, the OECD report, which was published this week, shows.

The report authors add that solid labour market outcomes and supportive financial conditions continue to underpin household spending, but that higher tariffs could add to business costs, and that the growth of business investment and exports has moderated.

GDP growth in the euro area is projected to remain subdued at around 1% in 2019 and 2020. Wage growth and accommodative macroeconomic policies, including modest fiscal easing, are supporting household spending, but policy uncertainty, weak external demand and low confidence continue to weigh on investments and exports.

In South Africa, GDP growth is projected to remain soft, at around 0.5% for this year and 1% in 2020. Weak global trade, lower metals prices and declining new orders are hampering exports and business investment, but low inflation and monetary policy easing should help support household spending, the report outlines.

While solid consumer demand has supported global service sector output to date, persistent weakness in manufacturing sectors and continuing trade tensions may weaken employment growth, household income and spending.

Meanwhile, substantial uncertainty persists about the timing and nature of the withdrawal of the UK from the European Union (EU), particularly as concerns surrounding a possible no-deal exit could push the UK into a recession in 2020 and lead to sectoral disruptions in Europe.

GDP growth for the UK, as a result, is expected to be around 1% in 2019 and 2020, even if the exit from the EU were to proceed smoothly with a transition period, as is assumed, the OECD says.

However, growth has weakened, which reflects persistent uncertainty and weak investment, but a sizeable fiscal easing should help to support demand next year, it adds.

Other risks, including the overall slowdown in the Chinese economy and significant financial market vulnerabilities from the tension between slowing growth, high debt and deteriorating credit quality, are also weighing on future growth, the report states.

“The global economy is facing increasingly serious headwinds and slow growth is becoming worryingly entrenched,” OECD chief economist Laurence Boone comments, adding that the uncertainty provided by the continuing trade tensions has been long-lasting and is reducing activity globally.

Governments need to seize the opportunity afforded by today’s low interest rates to renew investment in infrastructure and promote the economy of the future, Boone suggests.

Meanwhile, the OECD has called on central banks to remain accommodative in the advanced economies, but stressed that the effectiveness of monetary policy could be enhanced in many advanced economies if accompanied by stronger fiscal and structural policy support.

The report also mentions that fiscal policy should play a larger role in supporting the economy by taking advantage of the low long-term interest rates for wider public investment to support near-term demand and future prosperity.

“Greater structural reform ambition is required in all economies to help offset the impact of the negative supply shocks from rising restrictions on trade and cross-border investment and enhance medium-term living standards and opportunities.”

Edited by Chanel de Bruyn
Creamer Media Senior Deputy Editor Online

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