Emerging market slowdown, fall in trade cloud global outlook

A sharp downturn in emerging market economies and world trade has weakened global growth and is a source of uncertainty in the near term, the OECD noted in its latest global outlook.

The organization forecasts global economic growth of 2.9 percent this year, which is significantly below the long-run average.

The OECD Economic Outlook projects a gradual strengthening of global growth in 2016 and 2017 to an annual 3.3 percent and 3.6 percent, respectively, but this is predicated on a smooth rebalancing of the Chinese economy and more robust investment in advanced economies.

Compared with the OECD’s previous outlook, emerging market challenges, weak trade and concerns about potential output suggest higher downside risks and vulnerabilities.

“The slowdown in global trade and the continuing weakness in investment are deeply concerning,” said OECD Secretary-General Angel Gurría. “Robust trade and investment and stronger global growth should go hand in hand. G-20 leaders meeting in Antalya need to renew their efforts to secure strong, sustainable and balanced growth.”

In the U.S., output remains on a solid growth trajectory, propelled by household demand, with GDP expansion expected to be 2.5 percent next year and 2.4 percent in 2017, according to the report.

Meanwhile, the recovery in the euro area is set to strengthen, helped by accommodative monetary policy, lower oil prices and an easing of the pace of budget tightening. Overall euro area economic activity is expected to grow by 1.8 percent in 2016 and 1.9 percent in 2017.

In contrast, the Japanese recovery was derailed in 2015 by a sharp slowdown in demand from other Asian economies and sluggish consumption. Japan’s GDP growth is expected to accelerate to 1.0 percent next year, but to slow to 0.5 percent in 2017 due to a planned consumption tax hike, the OECD said.

Economic growth in China is projected to slow to 6.8 percent in 2015 and to continue to decline gradually thereafter, reaching 6.2 percent by 2017, as the export-led economy shifts to domestic consumption and services.

However, containing financial stability risks and achieving this rebalancing without a sharp reduction in GDP growth represent significant challenges, the OECD said.

The outlook further noted that in other emerging economies, headwinds have generally increased, reflecting weaker commodity prices, tighter credit conditions and lower potential output growth, with the risk that capital outflows and sharp currency depreciations may expose financial vulnerabilities. Brazil and Russia have experienced recessions and will not return to positive growth in annual terms until 2017. In turn, growth prospects in India remain relatively robust, with GDP growth expected to remain over 7 percent in the coming years, provided further progress is made in implementing structural reforms.

The outlook generally calls for greater ambition by OECD and G20 countries in supporting demand and pursuing structural reforms to boost potential growth and ensure that its economic benefits are shared by all.

It calls for policies to support short-term demand, including on-going monetary and fiscal policy support in accordance with countries’ policy space. Collective action to increase public investment is essential and would increase growth without increasing debt-to-GDP ratios.

In the run up to the COP21 UN Climate Change Conference in Paris, a special chapter of the Economic Outlook calls for unequivocal action to address climate change.

Most climate policies could be budget-neutral and support growth, the OECD said, highlighting examples of countries that have taken action successfully without negative consequences.