Rising trade tensions and policy uncertainty have set up global economic growth for the worst year since the financial crisis. The Organisation for Economic Co-operation and Development said in its latest Interim Economic Outlook that the global economy has become increasingly fragile and uncertain, with growth slowing and downside risks continuing to mount.
The outlook warns that economic prospects are weakening in advanced and emerging economies and global growth could remain persistently low without firm policy action from governments.
Escalating trade conflicts are taking a toll on confidence and investment, which combined with policy uncertainty, aggravates the risks in financial markets and endangers the already poor growth prospects worldwide, the OECD said.
Substantial uncertainty stems also from the possible no-deal withdrawal of the United Kingdom from the European Union, as a possible no-deal Brexit could push the UK into recession in 2020 and lead to sectoral disruptions in Europe.
The overall slowdown in the Chinese economy and significant financial market vulnerabilities from the tension between slowing growth, high debt and deteriorating credit quality are additional risk factors weighing on future growth.
Although solid consumer demand has supported service sector output to date, a lasting weakness in manufacturing sectors and continuing trade tensions could weaken employment growth, household income and spending.
The organisation projects that the global economy will grow by 2.9% in 2019 and 3% in 2020 – the weakest annual growth rates since 2009, with downside risks continuing to mount. The outlook, which covers all G‑20 economies, revised downward its projections for almost all countries from its previous report in May. Countries subject to this year’s decline in global trade and investment are most affected.
“The global economy is facing increasingly serious headwinds, and slow growth is becoming worryingly entrenched,” said OECD Chief Economist Laurence Boone. “The uncertainty provoked by the continuing trade tensions has been long-lasting, reducing activity worldwide and jeopardising our economic future. Governments need to seize the opportunity afforded by today’s low interest rates to renew investment in infrastructure and promote the economy of the future,” Boone said.
The Interim Outlook calls on central banks to remain accommodative in advanced economies, but stresses that the effectiveness of monetary policy could be enhanced by higher government spending and structural policy reform.
The OECD notes fiscal policy should play a larger role in supporting the economy, by taking advantage of exceptionally low long-term interest rates for wider public investment to support near-term demand and future prosperity.
Meanwhile, greater structural reform ambition was required in all economies to help offset the impact of the negative supply shocks from rising restrictions on trade and cross-border investment.