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OECD: World Economy Only ‘B-Minus’

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OECD: World Economy Only ‘B-Minus’

The Asian picture is mixed, with downgrades for China and Japan.

OECD: World Economy Only ‘B-Minus’
Credit: Hong Kong port via hxdyl /

The OECD has cut its forecasts for global growth, giving the world economy only a “muddling-through” B-minus grade amid weak investment and poor productivity.

Releasing its latest “Economic Outlook” report Wednesday, the Paris-based international economic organization said the world economy would expand by 3.1 percent this year and 3.8 percent in 2016, down from its November forecasts of 3.6 percent and 3.9 percent, respectively. In 2014, the world economy grew by 3.3 percent, after an average growth rate of 3.9 percent a year in the decade to 2011.

The OECD blamed the weaker forecasts on the “unexpected weakness seen in the first quarter of 2015,” particularly in the United States and China, resulting in the most sluggish quarter since the 2008-09 global financial crisis.

It said “productivity growth continues to disappoint, reflecting in part tepid business investment which has weakened the spread of new technologies,” while weak investment was hindering any rise in consumption, job creation and wage hikes.

“The global economy is projected to strengthen, but the pace of recovery remains weak and investment has yet to take off,” OECD Secretary General Angel Gurría said in a statement. “The failure to trigger strong, sustainable growth has had very real costs in terms of lost jobs, stagnant living standards in advanced economies, less vigorous development in some emerging economies, and rising inequality nearly everywhere.”

The organization cut its forecasts for the U.S. economy to gross domestic product (GDP) growth of 2 percent this year and 2.8 percent in 2016, down from its previous forecasts of 3.1 percent and 3 percent, respectively. It said U.S. governments at all levels had scope to accelerate investment spending, while the U.S. Federal Reserve likely would keep rates near zero “until at least September 2015 before edging upward at a cautious pace.”

For Europe, “bolder-than-expected” monetary easing by the European Central Bank and the resulting depreciation in the euro sparked an improvement in the eurozone’s outlook. The OECD upgraded its forecasts to 1.4 percent in 2015 and 2.1 percent next year, compared to its previous projections of 1.1 percent and 1.7 percent, although it warned that uncertainty over Greece could still derail the recovery.

Asia Mixed

The OECD painted a mixed picture for Asia however, with downgrades for China and Japan but continued growth for India, among other forecasts.

China’s growth forecasts were cut to 6.8 percent this year and 6.7 percent in 2016, down from the OECD’s previous projections of 7.1 percent and 6.9 percent. The OECD blamed the deceleration in the world’s second-biggest economy on “restructuring underway in the Chinese economy as services replace manufacturing and real estate investment as the main driver of growth,” with investment already a smaller fraction of GDP than consumption.

“Investment efficiency has fallen in recent years on the back of growing excess capacity in real estate and several manufacturing industries. Market forces should be allowed to play a greater role in allocating resources, in particular capital. To that end, a level playing field for all firms needs to be established by gradually removing implicit guarantees to state-owned enterprises,” the OECD said.

It also called for further monetary easing to “stabilize growth and contain deflationary pressures,” along with further fiscal easing to boost activity.

For Japan, the OECD cut its forecast for 2015 to 0.7 percent GDP growth compared to the 0.8 percent expected previously, but raised its forecast for 2016 to a 1.4 percent rise compared to its previous 1 percent. Cheaper oil, increased exports on the back of a weak yen and real wage increases are among factors driving the recovery in the world’s third-biggest economy, the organization said.

Japan should also win its war against deflation, with the OECD predicting inflation of 1.5 percent by the end of 2016, while unemployment should fall to 3.3 percent by next year.

However, the OECD said the Bank of Japan must continue its quantitative easing policy “until the 2 percent inflation target has been sustainably achieved.” It also called for a “detailed and credible fiscal consolidation plan” to attain the target of a primary budget surplus by fiscal 2020, “as well as faster output growth through bold structural reforms, including those in Japan’s growth strategy.”

With Japan’s new corporate governance code launched on June 1, the OECD said further reforms including to product markets would help encourage firms to invest their large cash holdings, as well as improving the nation’s relatively low rate of firm creation.

However, it warned of the risk of “sluggish nominal wage growth” as well as a potential loss of confidence should Tokyo fail to devise a realistic path toward improved government finances.

Neighboring South Korea is predicted slowing to around 3 percent growth this year, “reflecting sluggish private consumption in the context of high household debt and stagnant wages.” However, output growth is seen rising to around 3.5 percent in 2016 on the back of a projected recovery in world trade and its free trade deals with China, Australia and others.

The OECD said the nation needed “wide-ranging structural reforms” to prevent output remaining below potential for the fourth straight year, as well as supportive fiscal and monetary policy. It also noted South Korea’s vulnerability to a slowdown in China, with such exports accounting for 14 percent of its GDP.

India is expected to overtake China as the world’s fastest-growing major economy this year, and the OECD did not disappoint the India bulls. The world’s ninth-biggest economy is forecast to deliver “strong and stable” growth of 7.3 percent this year, rising to 7.4 percent in 2016 as structural reforms take effect, including easing business regulations and the “Made in India” initiative, along with the benefit of falling oil prices.

The OECD urged New Delhi to further improve “public spending efficiency” and increase revenues to fund greater public investment in physical and social infrastructure. It said food, fertilizer and oil subsidies should be better targeted, with the envisaged sales tax and corporate tax reforms implemented swiftly.

While praising coal deregulation and the opening up of sectors such as construction, rail and insurance to foreign direct investment, the OECD said further reforms were needed to “reduce uncertainties surrounding land acquisition and tax regulations and to improve the quality of electricity and transport systems.”

In Indonesia, the OECD said growth would pick up from 4.9 percent in 2015 to 5.5 percent next year, helped by increased public spending, improved confidence and a weakening currency, although inflation would likely remain high.

The organization said Jakarta had scope for fiscal expansion should the economy stall, although it said structural reforms would be crucial to “improve the business environment and the fight against corruption.” It also said the government would have to overcome “significant political, administrative and implementation impediments” to accelerate investment plans and overcome critical bottlenecks in such areas as transport, electricity and water.

Further south, Australia is predicted to see growth accelerate from 2.3 percent in 2015 to 2.9 percent next year, aided by growing momentum in consumption, non-resource investment and exports.

“Enhancing the climate for business investment in non-commodity sectors requires maintaining sound macroeconomic policies, further tax reform, cuts to red tape and competition-boosting measures. Plans to boost investment in public infrastructure are welcome, but project selection requires rigorous cost-benefit analysis,” it said.

On Wednesday, the Australian Bureau of Statistics announced real economic growth of 0.9 percent in the March quarter, exceeding market expectations of a 0.7 percent gain, and a year-on-year increase of 2.3 percent, with Treasurer Joe Hockey describing it as “a good solid result.” However, other economists noted that net disposable income per capita had dropped to its lowest level since 2008, with falling commodity prices and sluggish wages growth reducing national income.

Summing up its latest analysis, the OECD said policymakers needed to ensure stronger capital spending, including increased investment in education and aid for low-wage workers to prevent rising inequality. According to an earlier report, “income inequality has reached record highs in most OECD countries and remains at even higher levels in many emerging economies.”

“To move from a ‘B-minus’ grade to an ‘A’ means boosting investment in order to create jobs and stimulate consumption,” OECD chief economist Catherine Mann said. “It means putting in place structural policies to raise productivity and encourage competitive markets as part of a package combining monetary and fiscal policies that deliver adequate demand growth and reduce policy uncertainty.”

However, the organization also pointed to risks including weaker than expected investment, the potential failure of easy money policy to spur growth in the eurozone and Japan, and possible unfavorable oil price changes, along with extraordinary risks such as a disorderly exit from quantitative easing in the United States, problems between Greece and its creditors and a “hard landing” in China.

“If homework is not done and with less than average luck, a failing grade is all too possible,” Mann warned. For policymakers, studying the report could be a good start in scoring better grades and getting the world economy back on track.