Global economy still stuck in ‘low growth trap’ warns OECD

A strong upswing in business and consumer confidence and buoyant financial markets are not enough to pull the world out of a “low-growth trap”, the Organisation for Economic Co-operation and Development said on Tuesday as it released its latest forecasts.

The Paris-based international organisation noted it had not revised up its growth forecasts from those in November so there was now a troubling disconnect between buoyant financial market valuations and real economy prospects.

It repeated its calls for an immediate loosening of fiscal policy to give the upswing more vitality and for countries to redouble their economic policy reform efforts to improve longer-term prospects.

The OECD expects the global growth rates to improve over the next two years although only to around the average level of the past few decades.

It forecasts global growth of 3.3 per cent this year and 3.6 per cent in 2018, following relatively weak growth of 3 per cent in 2016. Before the financial crisis, the global economy easily surpassed 4 per cent growth a year.

Without significant forecasting changes for leading economies, US prospects are expected to pick up most strongly with growth rising to 2.8 per cent in 2018, although this would be considerably short of the Trump administration’s ambition to sustain 3 to 4 per cent growth rates.

The eurozone is expected not to repeat its 2016 feat of growing faster than the US and to maintain growth around 1.6 per cent in the next two years with falling unemployment.

China is predicted to moderate its growth rate a touch from 6.7 per cent last year to 6.3 per cent in 2018, a rate now comfortably below that of India which has taken the mantle of fastest growing large economy and is predicted to expand 7.7 per cent in 2018, up from 7 per cent last year.

As with most other forecasters, the OECD has revised up its forecast for UK growth following the strength in the second half of last year, but still expects a squeeze on incomes to slow the British economy, with growth falling from 1.8 per cent in 2016 to 1 per cent in 2018.

Firing a warning shot across the bows of the US administration ahead of next week’s Group of 20 meeting in Germany, the OECD welcomed signs of an improvement in trade growth in Asia and warned that protectionist measures would undermine the whole global economy, including the countries that increased trade barriers.

It said an increase in trade barriers back to the allowable levels of 2001, “would have a major adverse impact on trade and GDP, particularly for those economies that imposed new trade barriers”.

This risk alongside asset prices it sees as detached from reality, increase the risks to the forecasts, it said. Recent rapid rises in house prices in Australia, Canada, Sweden and the United Kingdom “can be a precursor of an economic downturn”.