The Organisation for Economic Cooperation and Development is of the view that potential currency volatility, overblown stock markets, or risks from increased trade barriers may not be withstood by the global economy and it may not be strong enough.
The pace is still too slow and warned there’s much that could derail it even while forecasting a pickup in growth this year and next, it said. Global expansion will pick up from 3 percent in 2016 to reach 3.3 percent this year and pick up again in 2018, the OECD expects. But because of weak investment and productivity gains compared to the two decades before the financial crisis, the pace will remain short of its average in that period.
“We have acceleration but I’m concerned about this really soft foundation to the recovery,” OECD Chief Economist Catherine Mann said in an interview. “We still have this slow, sluggish productivity growth and persistent inequality. Put those together and it’s hard to see the robust consumption and investment profile you need to really get things going.”
Including Trump’s threats to impose tariffs on nations he deems to have an unfair advantage, some of the concerns are related to the policies of U.S. President Donald Trump’s administration, though he was not named in the report. With the market performance partly linked to anticipation of a Trump stimulus package, there’s a “disconnect” between equity valuations and the outlook for the real economy, the OECD also said.
“We think the dynamic response to increased protectionism could be really quick, so we have a pretty significant downward bias on what it could mean for growth,” Mann said. “What we mean by that is the way businesses will respond by raising prices and cutting trade flows.”
From the shift in the interest-rate cycle, potential exchange rate volatility was highlighted by the OECD. In what may be the start of a series of hikes this year, the U.S. Federal Reserve is forecast to increase interest rates next week. In contrast, pressing on with its planned stimulus program through 2017 is the European Central Bank.
“Although risks may not materialize immediately, they remain a real possibility and a set of large shocks, possibly interacting with each other, would disrupt the recovery,” the OECD said.
Because, while generating little revenue in that currency from exports, Turkey has external debt amounting to more than 50 percent of gross domestic product, and hence it is among the countries most exposed to a strengthening dollar. The OCED said that though Mexico’s dollar-generating exports offer it some protection, it also has significant dollar liabilities of about a fifth of GDP.
And in Europe where Germany, France and the Netherlands face elections, political risks may also assert themselves. The OECD data noted that particularly in France, the U.S. and Greece, there has been a slump in the confidence in national governments.
“Falling trust in national governments and lower confidence by voters in the political systems of many countries can make it more difficult for governments to pursue and sustain the policy agenda required to achieve strong and inclusive growth,” the OECD said.
(Adapted from Bloomberg)