The heat is on world leaders meeting at Brisbane’s G20 Leaders’ Summit to boost economic growth, following more warnings of a sluggish global recovery. With forecasts of a heat wave for the city, the political temperature is also rising on challenges including Ebola and climate change.
Announcing Thursday its latest Economic Outlook, the OECD said the global economy remained stuck in low gear, with the risk of further stagnation without substantial action.
“We have yet to achieve a broad-based, sustained global expansion, as investment, credit and international trade remain hesitant,” OECD Secretary General Angel Gurría said in a statement.
“Financial risks remain high and may increase market volatility in the coming period. There is an increasing risk of stagnation in the euro area. Countries must employ all monetary, fiscal and structural reform policies at their disposal to address these risks and support growth.”
The Paris-based international economic organization said global growth would reach 3.3 percent this year, rising to 3.7 percent in 2015 and 3.9 percent the following year, down from its September forecast and still a modest pace compared with the years prior to the global financial crisis.
Similar to other projections, the United States is seen driving the recovery with growth of 2.2 percent this year and “around 3 percent” in 2015 and 2016. The eurozone is expected to gradually emerge from recession with a sluggish 0.8 percent GDP rise in 2014, expanding to 1.1 percent in 2015 and 1.7 percent in 2016.
China is seen slowing to 7 percent growth over 2015 and 2016, down from the projected 7.4 percent rise this year, as the world’s second-biggest economy attempts “a controlled slowdown to more sustainable growth rates.”
The projection came amid weak industrial production, electricity generation and other Chinese data for October, with ANZ Research noting that Beijing may cut next year’s growth target to 7 percent. According to the Chinese Academy of Social Sciences, the nation’s potential growth rate will moderate to just 5.7-6.6 percent over 2015 to 2020, “due to unfavorable demographic changes and diminishing return on investment.”
The OECD said growth in the world’s third-biggest economy, Japan would reach only 0.9 percent this year, 1.1 percent in 2015, and just 0.8 percent in 2016, on the basis of consumption tax hikes this year and next, although considerable debate remains over whether the planned hike in October 2015 will proceed.
On a brighter note, India is expected to pick up speed from 5.4 percent growth this year to 6.4 percent in 2015 and 6.6 percent in 2016, helped by rising investment, while Indonesia expands from 5.4 percent in 2015 to 6 percent in 2016, both countries having recently installed reformist leaders.
South Korea is predicted to post 3.8 percent growth in 2015 and 4.1 percent in 2016, while Australia is seen continuing its economic winning streak with growth of 2.5 percent in 2015 and 3 percent the following year.
‘Significant Downside Risks’
Yet the OECD warned of “significant downside risks” to its forecasts, including further weakness in the eurozone, with a “rising risk of a prolonged period of stagnation and low inflation.” The U.S. Federal Reserve’s tighter monetary policy could cause further volatility for emerging markets, while high levels of debt in advanced and emerging economies “raise financial stability concerns.”
The organization urged policymakers to improve the growth outlook, including through expansionary monetary policy. In a vote of support for Bank of Japan Governor Haruhiko Kuroda’s recent “Halloween surprise,” the OECD said the nation’s central bank “should continue quantitative easing until its inflation target has been sustainably achieved.”
The OECD also called for “a considerable easing of the pace of consolidation” of fiscal policy in many advanced economies, “notably the United States and the euro area,” although it urged Japan to “proceed steadily” with efforts to restore its fiscal balance.
It also urged “ambitious structural reforms” to complement expansionary macroeconomic policies, with the G20 nations set to unveil in Brisbane growth strategies that could collectively increase GDP by about 2 percent by 2018, relative to the 2013 level, amounting to a gain of $2 trillion.
“Reforms to tax, trade, labor, and product markets will benefit domestic investment and global trade, and support greater employment and consumption around the world,” OECD chief economist Catherine Mann said.
“The potential pay-off from the structural reform agenda under consideration is tremendous, but countries must implement the measures that have been identified to get the global economy into higher gear. Macroeconomic policy support must be part of the package.”
However, while describing the G20 target as “admirable,” UBS Global Asset Management investment analyst Tracey McNaughton told the Australian Financial Review that the “reality of below-average growth” in emerging markets would be hard to escape.
“Part of that problem relates to the fact that global trade has collapsed, so a lot of these countries have a very high proportion of their GDP in exports,” she said. “A lot of these emerging markets have been shaken from their reform path.”
McNaughton said policymakers now faced bigger challenges than before the global financial crisis, including worsening demographics, decaying infrastructure and heightening political tensions.
“It’s interesting that in the wake of the GFC we’ve seen a depletion of political capital and, as a result of that, we’ve seen a rise of populist policymaking,” Ms McNaughton said.
“It means a lot of [emerging market nations] are falling back into their old habits. . .They’ve basically been shaken off that reform path and it’s going to take a lot to get back on it.”
With G20 leaders including British Prime Minister David Cameron calling for more action on the Ebola crisis, and a climate change deal between the United States and China putting the issue on the economic agenda, world leaders have their hands full in revitalizing a faltering global economic and political outlook.