Spend for growth, OECD urges governments

PARIS — The world risks getting caught in a low-growth trap, denting the future of generations to come, unless governments step up spending quickly, the Organisation for Economic Cooperation and Development (OECD) warned on Wednesday.

Tepid worldwide recovery since the global economic crisis in 2008 "has precipitated a self-fulfilling low-growth trap" said the organisation's chief economist Catherine Mann in its twice-yearly economic outlook.

"Without comprehensive, coherent and collective action, disappointing and sluggish growth will persist, making it increasingly difficult to make good on promises to current and future generations," she added.

The OECD chopped its forecast for global growth this year to 3 per cent, down from the 3.6 per cent it forecast in October. For 2017 it now sees 3.3 per cent growth.

The dismal economic recovery has created forces that are now working to perpetuate slow growth, it said.

In particular, businesses have little incentive to invest given soft demand, while muted wage gains, unemployment and income inequality have held back consumption. Uncertainty also puts the brakes on spending.

Spend, spend, spend 

After years during which international economic institutions urged governments to practise austerity, Mann said that now "fiscal policy must be deployed more extensively".

The OECD said "almost all countries have room to reallocate spending and taxation towards items that offer more support to growth" like investments in infrastructure as well as education. 

While central banks have been supporting the global recovery with ultra-low interest rates and stimulus measures, the OECD said, "it is clear that reliance on monetary policy alone has failed to deliver satisfactory growth and inflation."

Moreover today's low interest rates also provide an opportunity for governments to step up investment.

Mann said the need for governments to shift up spending is urgent.

"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," she said.

She warned that as things stand, negative shocks "could tip the world back into another deep downturn" while geopolitical risks to the global economy are on the rise.

Brexit risks 

The OECD sees the potential exit of Britain from the European Union following a referendum later this month as one major risk. 

If voters chose to leave, hits to trade, investment and spending would likely see the British economy grow by 3 percentage points less in the next four years than if voters choose to stay, according to the OECD.

Already, uncertainty surrounding a possible Brexit "has led to a significant slowdown in economic activity", although if voters choose to stay the OECD says it expects growth to pick up in the second half of this year. 

Ireland, Luxembourg and the Netherlands would be the first of Britain's European partners to bear the brunt in the event of Brexit, it said.

Britain itself could be buffeted by financial market turbulence akin to that seen at the height of the eurozone crisis in 2011 and 2012.

However, if Britain opts to remain in the EU in the referendum, which according to polls is a close call, growth will come in at 1.75 per cent this year, the OECD expects.

World markets went into a panic at the beginning of this year over the prospect of a sharp slowdown in China, which has been the source of most of global growth in recent years, but the OECD now sees growth moderating gradually thanks to recent government fiscal policy measures to support the economy.

It forecasts China's growth rate will slip to 6.5 per cent this year, and then 6.2 per cent in 2017.

China's economy grew by 6.9 per cent last year.

The strong dollar is expected to slow growth in the United States to 1.8 per cent this year, from 2.4 per cent last year.

Meanwhile, the eurozone is seen as marking time at 1.6 per cent growth.

Japan should get a marginal boost, with growth of 0.7 per cent this year, but then stumble to a mere 0.4 per cent expansion in 2017.

Brazil's outlook slashed

For Brazil, the OECD slashed its economic growth forecast, citing political uncertainty and corruption worries.

The Brazilian economy is now expected to contract by 4.3 per cent this year, against the 4 per cent downturn the OECD predicted only in February.

The OECD's view is much more pessimistic than market expectations compiled by Brazil's central bank, which currently point to a fall of around 3.8 per cent in growth.

"The deep recession is set to continue in 2016 and in 2017," it said.

For next year, the OECD now expects GDP to dive again, by 1.7 per cent, a sharp downward revision from its zero-growth forecast in February.