Emerging Market Slowdown and Drop in Trade Clouding Short-Term Global Outlook
Downturns in emerging market economies and world trade has weakened global growth to 2.9 percent this year—well below the long-run average—and is a source of uncertainty for near-term prospects, according to a new report from the Organization for Economic Cooperation and Development.
In its latest twice-yearly economic outlook, the OECD projects a gradual strengthening of global growth in 2016 and 2017 to an annual 3.3 percent and 3.6 percent respectively.
“The slowdown in global trade and the continuing weakness in investment are deeply concerning,” said Angel Gurría, the OECD Secretary General. “Robust trade and investment and stronger global growth should go hand in hand. G20 leaders meeting in Antalya need to renew their efforts to secure strong, sustainable and balanced growth.”
In the United States, 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.
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. Euro area activity is expected to grow by 1.8 percent in 2016 and 1.9 percent in 2017.
In Japan, 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 the planned consumption tax hike.
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 activity rebalances towards consumption and services. Achieving this rebalancing, while avoiding a sharp reduction in GDP growth and containing financial stability risks, presents significant challenges, the OECD report noted.
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. By contrast, growth prospects in India remain relatively robust, with GDP growth expected to remain over seven percent in the coming years, provided further progress is made in implementing structural reforms.
OECD’s report calls for policies to support short-term demand, including ongoing 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.