Whether it’s cyclical or brought on by trade conflicts, the global economic expansion appears to have peaked, with diverging growth prospects worldwide and intensifying risks, the new “Interim Economic Outlook” from the Organization for Economic Cooperation & Development (OECD) said.
The OECD said economic growth prospects are now slightly weaker across the board than anticipated in its May “Economic Outlook.” Escalating trade tensions, tightening financial conditions in emerging markets and political risks could further undermine any potential sustainable medium-term growth worldwide.
The OECD projects that the global economy will grow 3.7% percent in 2018 and 2019, with substantial differences across countries and regions. Growth performance has been strong in the U.S., India and China, for example, but has faltered elsewhere. This is in contrast to the broad-based expansion seen in the second half of 2017 and first half of 2018.
Worldwide economic confidence has weakened, and trade and investment growth have proven slower than anticipated, while wage growth has been modest in most countries despite unemployment having fallen below rates experienced before the Great Recession of 10 years ago.
“Trade tensions are starting to bite, and are already having adverse effects on confidence and investment plans,” Laurence Boone, OECD chief economist, said. “Trade growth has stalled, restrictions are having marked sectoral effects and the level of uncertainty on trade stances remains high.”
Boone said it is vital for countries to end the slide toward further protectionism and reinforce the global rules‑based international trade system, in addition to increasing international dialogue that will give the business sector the confidence to invest.
“With tighter financial conditions creating stress on a number of emerging economies, especially Turkey and Argentina, a strong and stable policy framework will be key to avoid further turbulence,” Boone said.
The new outlook cites the slowdown in trade growth, combined with board political uncertainty, as the principal factor weighing on the world economy. It emphasizes that further trade restrictions could have adverse effects on jobs and living standards, particularly for low-income households.
In a blog post accompanying the outlook report, Boone, wrote, “World trade in goods has markedly slowed in recent months, with acute impacts in the sectors directly targeted. For instance, the prices of washing machines for U.S. consumers jumped by 20 percent between March and July this year after the imposition of tariffs. U.S. imports of steel from China are sharply down, just like Chinese imports of cars from the U.S. Down the line, higher tariffs mean higher prices for consumers, less investment and less jobs for workers, and ultimately losses in productivity and standards of living. Just consider that 13 million jobs in the U.S. and 8 million in Japan depend, directly or indirectly, on foreign consumption.”
“In case risks materialize further, there is little space left for monetary policy to react in advanced economies,” Boone added in her blog. “This makes it all the more important for countries currently enjoying strong growth not to widen fiscal deficits to support an already vibrant consumption, but instead to rebuild room for maneuver for those which lack it, and expand public investment to shore up the foundations for sustained growth for all.”