OECD downgrades global growth, says world’s economy needs urgent fiscal response from governments

Financialpost.com
Feb. 18, 2016
By John Shmuel

The global economy is growing at a stubbornly weak pace and governments should be deploying fiscal tools alongside monetary policy to stoke growth, the Organisation for Economic Co-operation and Development said in its latest outlook Thursday.

The OECD downgraded its 2016 global growth outlook to three per cent from 3.3 per cent, matching last year’s underwhelming growth rate. Canada received one of the sharpest downgrades among developed countries, with growth predicted to average only 1.4 per cent this year, compared with a forecast of two per cent made in November.

Global growth is trending at its weakest pace in five years, a disappointing figure for economies now seven years removed from the 2009 recession.

“The downgrade in forecasts is widespread, reflecting a broad range of disappointing incoming data for the fourth quarter of 2015 and the recent weakness and volatility in global financial markets,” the OECD said in its outlook. “These trends have been apparent in both advanced and emerging economies.”

The organization, which includes 34 primarily high-income countries, voiced concern that the current recovery is taking longer than expected, with many countries still well below their long-run growth averages.

“[Growth is lower] than would be expected during a recovery phase for advanced economies and given the pace of growth that catching-up emerging economies could achieve,” the OECD said.

The global economy is currently displaying a number of worrying trends that the organization says warrant close watch. World trade, for instance, has been slowing in the past two years, with trade volumes growing by only two percent last year - a level which the OECD says has been “associated with very low outcomes for global GDP growth” in the past.

The organization joins a growing list of voices declaring that monetary policy alone is no longer enough to stoke the world’s economy. Many central banks in advanced economies have set their rates to zero in the hopes that low borrowing costs would boost consumer demand, but growth remains persistently weak in countries such as Japan and the eurozone, where some of the most accommodative policy has been used.

The OECD cautioned that relying solely on monetary policy any longer risks creating a “low-growth equilibrium” where weak demand, low investment and low inflation linger. It said that fiscal policy was “urgently needed” to fight those challenges.

“Experience to date suggests that reliance on monetary policy alone has been insufficient to deliver satisfactory growth, so that greater use of fiscal and structural levers is required,” the organization said.

At the moment, many of the world’s advanced economies, such as the United States and those in the eurozone, are not talking about fiscal spending as a tool to kickstart their economies. Some countries faced with large budget deficits, such as Japan, are cutting back on spending entirely. Canada is one of the few countries that is planning to undertake a large fiscal spending program to reignite its struggling economy.

The OECD said that more countries need to move into the fiscal spending camp, especially as current growth rates will not support their attempts to balance budgets.

“Meeting fiscal plans will remain challenging while nominal growth outcomes disappoint, hence pointing to the need for a new strategy,” said the OECD.