The global economy is slowing and major risks persist, with growth weakening much more than expected in Europe, according to the OECD’s latest Interim Economic Outlook. Economic prospects are now weaker in nearly all G20 countries than previously anticipated. Vulnerabilities stemming from China and the weakening European economy, combined with a slowdown in trade and global manufacturing, high policy uncertainty and risks in financial markets, could undermine strong and sustainable medium-term growth worldwide.
The OECD projects that the global economy will grow by 3.3 per cent in 2019 and 3.4 per cent in 2020. The outlook and projections cover all G20 economies. Downward revisions from the previous Economic Outlook in November 2018 are particularly significant for the euro area, notably Germany and Italy, as well as for the United Kingdom, Canada and Turkey.
The Outlook identifies the Chinese and European slowdown, as well as the weakening of global trade growth, as the principal factors weighing on the world economy. It underlines that further trade restrictions and policy uncertainty could bring additional adverse effects on global growth. While policy stimulus is expected to help offset weak trade developments in China, risks remain of a sharper slowdown that would hit global growth and trade prospects.
The global economy is facing increasingly serious headwinds, said OECD Chief Economist Laurence Boone. A sharper slowdown in any of the major regions could derail activity worldwide, especially if it spills over to financial markets. Governments should intensify multilateral dialogue to limit risks and coordinate policy actions to avoid a further downturn, Boone said.
The Outlook calls on central banks to remain supportive, but stresses that monetary policy alone cannot resolve the downturn in Europe or improve the modest medium-term growth prospects. A new coordinated fiscal stimulus in low-debt European countries, together with renewed structural reforms in all euro area countries would add momentum to a growth rebound, boost productivity and spur wage growth over the medium term.
The global expansion continues to lose momentum, amidst heightened policy uncertainty, persistent trade tensions and ongoing declines in business and consumer confidence. Global growth slowed more quickly than anticipated in the latter half of 2018, to around 3% on a quarterly basis. This was the weakest pace since mid2016, in part reflecting the deep recessions occurring in some emerging-market economies and widespread weakness in industrial sectors.
Confidence indicators have slowed markedly in OECD countries (Figure 1, Panel B), especially in the euro area and the United Kingdom, where growth has disappointed, and also in China, where concerns linger about the extent of the slowdown. One-off factors have contributed to the weakness in Europe, such as the disruption to the car sector following new vehicle-emission tests. However, business investment prospects have also weakened, reflecting declining confidence and continued policy uncertainty.
Trade growth, a key artery in the global economy, has also slowed markedly, to around 4% in 2018 from 5¼ per cent in 2017, with trade restrictions having adverse effects on confidence and investment plans around the world. In Europe, trade growth has stalled, reflecting a slowdown in both external and internal demand. Leading indicators suggest that near-term trade prospects are weak. Survey indicators of new export orders remain low in China and continue to decline in Europe and many Asian economies.
Even in the absence of further trade restrictions, the slowdown in many key trading economies – such as Germany, China, the United Kingdom and Italy – is acting to weaken growth in their trading partners in Europe and in Asia given their importance as export markets and in regional supply chains. A number of factors have cushioned the slowdown in growth. Improving labour market conditions continue to support household incomes and spending in many economies. Macroeconomic policies also generally remain supportive. Financial market conditions have improved and commodity prices are lower.
The significant repricing of risk in financial markets seen at the end of last year has been partially reversed, amidst signals by major central banks that monetary policy may remain more accommodative than previously expected. Oil prices have also eased, despite continued supply restrictions by OPEC and Russia, helping to lower headline inflation around the world, and boost household real income growth.
Global growth is set to slow further this year, with downward revisions in most G20 countries Overall, recent economic and financial developments, and the materialisation of some downside risks, suggest that global growth prospects have eased since the November Economic Outlook, especially in Europe. Global GDP growth is projected to slow from 3.6% in 2018 to below-trend rates of 3.3% this year and 3.4% in 2020, with downward revisions in most G20 economies.
In the advanced economies, improved labour market conditions, lower headline inflation and supportive fiscal measures targeted at lower-income households in some countries, including France and Italy, should help to support real income growth and household spending. Monetary policy support also continues to underpin activity. However, continued policy uncertainty and declining confidence are set to weigh further on business investment and trade prospects. Growth prospects in the emerging-market economies are collectively projected to be steady over 2019-20, but this masks diverging developments in the major economies.
A gradual slowdown appears set to persist in China, despite renewed policy support, and substantial adjustment challenges are continuing in those economies hard hit by the financial market stress seen last year. In other countries, including India and Indonesia, downside risks from financial market tensions have eased, and strong investment, improving income growth and past reforms are helping to support domestic demand.
Brexit-related uncertainties persist Uncertainty persists about the timing of UK withdrawal from the European Union (Brexit) and the nature of the UK-EU trading relationship in the short and medium-term. The possibility that a withdrawal agreement will not be reached before the exit date remains a serious downside risk and source of uncertainty in the near term. The current projections for UK GDP growth are conditional on the assumption of a smooth Brexit, with a transition period lasting until the end of 2020. If the United Kingdom and the European Union were to separate without an agreement, the outlook would be significantly weaker.
OECD analysis suggests that the increase in tariffs between the two economies as a result of WTO rules coming into effect would reduce GDP by around 2% (relative to baseline) in the United Kingdom in the next two years. This would add to the adverse effects on GDP and business investment already seen relative to expectations prior to the vote in 2016.
The effects could be stronger still if a lack of adequate border infrastructure and a loss of access to EU trade arrangements with third countries were to cause serious bottlenecks in integrated cross-border supply chains. The costs would also be magnified if this also induced a further decline in business and financial market confidence and disruptions in financial markets. In such a scenario the likely near-term recession in the United Kingdom would generate sizeable negative spillovers on growth in other countries.
Although contingency measures to soften the impact of a no-deal outcome are being taken by both sides, UK-EU separation without an agreement would still be a major adverse shock for Europe and possibly elsewhere in the world, given that the United Kingdom is an important trading partner for many countries. In the European Union, the impact of any scenario that resulted in trade between the United Kingdom and the European Union being undertaken on WTO terms would vary across member states.
Some smaller countries, including Ireland, the Netherlands and Denmark with strong trade and investment links with the United Kingdom, would be relatively exposed, resulting in significant adjustment costs in particular regions or sectors. OECD estimates suggest that their bilateral exports to the UK could decline by around 15% in the mediumterm in the event of trade being undertaken on WTO terms, with the strongest impacts being in the agri-food and machinery and equipment sectors.