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Weak Trade and Sluggish Investment Force Global Growth Rut

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The global economy is stuck in a rut and if policymakers don’t rally to dig it out, this period of low growth will go on. And on.

In its latest economic outlook released Wednesday, the Organisation for Economic Co-operation and Development (OECD) made it clear that collective action is the only way to remedy the economic malaise.

“Growth is flat in the advanced economies and has slowed in many of the emerging economies that have been the global locomotive since the crisis,” OECD Secretary-General Angel Gurría said in a statement. “Slower productivity growth and rising inequality pose further challenges. Comprehensive policy action is urgently needed to ensure that we get off this disappointing growth path and propel our economies to levels that will safeguard living standards for all.”

Global growth has floundered in the last eight years, and in OECD countries—which include the world’s most advanced economies plus some emerging nations like Mexico and Turkey—average growth hovered around 2 percent.

Growth is expected to be a modest 3 percent this year, flat to last year and down from 3.3% in 2014, thanks to weak trade growth, sluggish investment, subdued wages and slower activity in key emerging markets. The outlook for 2017 points to 3.3% growth.

“The prolonged period of low growth has precipitated a self-fulfilling low-growth trap,” the OECD said. “Business has little incentive to invest given insufficient demand at home and in the global economy, continued uncertainties, and a slowed pace of structural reform.”

More than that, despite a projected fall in the unemployment rate in OECD countries to 6.2% by 2017, 39 million will still be out of work, nearly 6.5 million more than pre-economic crisis.

The United States will see a moderate economic recovery, growing by 1.8% this year and 2.2% in 2017. The EU will see slower growth at 1.6% this year and 1.7% next. Japan’s growth is projected up 0.7% for 2016 and 0.4% the following year. Overall, the 34 OECD member countries will realize average growth around 1.8% in 2016 and 2.1% in 2017.

With China continuing to rebalance toward more consumption-oriented growth, economic conditions will slide lower to 6.5% this year and 6.2% next.

“Negative feedback-loops are at work,” OECD said. “Lack of investment erodes the capital stock and limits the diffusion of innovations. Skill mismatches and forbearance by banks capture labor and capital in low productivity firms. Sluggish trade prospects slow knowledge transfer. These malignant forces slow down productivity growth, constraining potential output, investment, and trade.”

According to the OECD, markets need to exercise a more comprehensive use of fiscal policy and revive structural reforms to flee this slump. Relying on monetary policy alone won’t deliver on growth, and contrary to past occurrences, additional monetary policy easing could prove less effective and even counterproductive in some cases.

More ambitious structural reforms, like targeting service sectors, could boost demand in the short term and boost employment, productivity growth and inclusiveness in the long term.

“If we don’t take action to boost productivity and potential growth, both younger and older generations will be worse off,” OECD’s chief economist, Catherine L Mann, said. “The longer the global economy remains in this low-growth trap, the harder it will be for governments to meet fundamental promises. The consequences of policy inaction will be low career prospects for today’s youth, who have suffered so much already from the crisis, and lower retirement income for future pensioners.”

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