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Global Economy Sees Strong Growth but Significant Risks Could Undermine Expansion

The global economy is experiencing stronger growth, driven by a rebound in trade, higher investment and buoyant job creation, according to the Organization for Economic Co-operation and Development’s (OECD) latest “Economic Outlook” report.

The pace of global expansion over the 2018-19 period is expected to stay close to around 4 percent, which is near the long-term average. However, the outlook emphasized that significant risks posed by trade tensions, financial market volatility and rising oil prices loom large, and more action is needed to secure a strong and lasting improvement in living standards.

“The economic expansion is set to continue for the coming two years and the short-term growth outlook is more favorable than it has been for many years,” OECD secretary-general Angel Gurria said. “However, the current recovery is still being supported by very accommodative monetary policy and increasingly by fiscal easing. This suggests that strong, self-sustaining growth has not yet been attained.”

These factors should continue to underpin the expansion, which is expected to see moderate rises in wage growth and inflation, according to OECD. Unemployment in the OECD area is seen dropping to the lowest levels since 1980, but more can be done to bring more people into the workforce.

“Policymakers need to put greater focus on structural policies to boost skills and to improve productivity to achieve strong, sustainable and inclusive growth,” Gurria said.

The outlook highlights a range of risks to the current expansion. Oil prices have risen significantly in the past year and could add to inflation while softening real household income growth. The threat of trade restrictions has begun to negatively affect confidence, and “if such measures were implemented, they would negatively influence investment and jobs,” the report noted.

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Risks also remain that the normalization of interest rates in some economies, notably the U.S., “could expose financial vulnerabilities and tensions created by elevated risk-taking in financial markets and high debt, especially in emerging market economies with high levels of foreign currency debt,” OECD said.

The outlook urges countries to boost investment in education and skills, and recommends policies to boost job creation and economic dynamism. These include improvements to digital and physical infrastructure, enhanced research and development collaboration between universities and industry, reduced barriers to entry in professional services sectors and less red tape.

Taking a slightly more conservative view was the “May World Forecast Flash” from Global Insight by IHS Markit chief economist Nariman Behravesh and executive director of global economics Sara Johnson.

“The world economy will most likely be sustained between 3 percent and 3.5% in the next few years,” the IHS economists said.

They reasoned that, “business cycles in the world’s major economies are mostly out of phase with one another. Specifically, the cycles in the U.S., U.K., German and Canadian economies are in a mature phase, whereas the Eurozone and Japanese economies are in earlier stages of expansion.”

Similarly, they said large emerging markets such as Brazil and Russia are just getting over recessions, while in the emerging world, growth in China is expected to “edge down slightly,” while the other large economies should pick up steam thanks to solid global growth and rising commodity prices.