Step up spend for growth, OECD urges governments

Paris / AFP

The world risks getting caught in a low-growth trap, denting the future of generations to come, unless governments step up spending quickly, the OECD warned on Wednesday.
Tepid worldwide recovery since the global economic crisis in 2008 “has precipitated a self-fulfilling low-growth trap” said the Organisation for Economic Cooperation and Development’s chief economist Catherine Mann said in its twice-yearly economic outlook.
“Without comprehensive, coherent and collective action, disappointing and sluggish growth will persist, making it increasingly difficult to make good on promises to current and future generations,” she added.
The OECD chopped its forecast for global growth this year to 3.0 percent, down from the 3.6 percent it forecast in October. For 2017 it now sees 3.3 percent growth. The dismal economic recovery has created forces that are now working to perpetuate slow growth, it said.

Spend, spend, spend
In particular, businesses have little incentive to invest given soft demand, while muted wage gains, unemployment and income inequality have held back consumption. Uncertainty also puts the brakes on spending.
After years during which international economic institutions urged governments to practise austerity, Mann said that now “fiscal policy must be deployed more extensively”.
The OECD said “almost all countries have room to reallocate spending and taxation towards items that offer more support to growth” like investments in infrastructure as well as education.
While central banks have been supporting the global recovery with ultra-low interest rates and stimulus measures, the OECD said “it is clear that reliance on monetary policy alone has failed to deliver satisfactory growth and inflation.”
Moreover today’s low interest rates also provide an opportunity for governments to step up investment. Mann said the need for governments to shift up spending is urgent.
“The longer the global economy remains in the low-growth trap, the more difficult it will be to break the negative feedback loops, revive market forces, and boost economies to the high-growth path,” she said.
She warned that as things stand, negative shocks “could tip the world back into another deep downturn” while geopolitical risks to the global economy are on the rise.
The OECD sees the potential exit of Britain from the European Union following a referendum later this month as one major risk.
If voters chose to leave, hits to trade, investment and spending would likely see the British economy grow by 3 percentage points less in the next four years than if voters choose to stay, according to the OECD.
World markets went into a panic at the beginning of this year over the prospect of a sharp slowdown in China, which has been the source of most of global growth in recent years, but the OECD now sees growth moderating gradually thanks to recent government fiscal policy measures to support the economy.
It forecasts China’s growth rate will slip to 6.5 percent this year, and then 6.2 percent in 2017.
China’s economy grew by 6.9 percent last year.
The strong dollar is expected to slow growth in the United States to 1.8 percent this year, from 2.4 percent last year.
Meanwhile, the eurozone is seen as marking time at 1.6 percent growth.