The global growth story is no longer new, but the broad-based economic recovery underway a decade after the 2008 financial crisis still needs some propping up from fiscal policy, according to the head of the Organization for Economic Cooperation and Development.
About three-quarters of OECD members are basing their fiscal policy on some kind of stimulus, Secretary-General Jose Gurria told CNBC on Tuesday during the organization’s yearly forum in Paris. This means that policy is driving “a good part” of the growth, he said.
On the other hand, monetary policy remains historically loose in many OECD countries, particularly across Europe and Japan.
“So you’re having a situation where this is not yet on its own,” said the secretary-general, a Mexican economist and diplomat who negotiated the North American Free Trade Agreement in 1994. “This is not yet moving by itself. It still needs some props, still needs some crutches. Policy crutches.”
“Perhaps less obvious than before, but still it means that if you would move the stimulus, perhaps this would flatten out and it means therefore that we just have to insist on the structural policy side,” he added.
A combination of low interest rates, public spending and tax cuts, particularly in the US for the latter, fall into the category of these fiscal “crutches”, Gurria said. The OECD in March projected global gross domestic product growth to hit around 4% this year, after reaching 3.7% in 2017. Four percent was the global rate of growth before the financial crisis hit.
The growth has put pressure on governments to start unwinding their decade-long monetary easing programs, slowly bringing interest rates back up to prevent an overheating of the economy. Some fear that a tightening process too soon or too quickly could threaten that long-awaited growth, while at the same time many market analysts say higher rates are needed to bring policy back to normal and create room to bring rates back down in the event of another recession.
Trade Tensions
Alongside a brighter growth outlook is the onset of trade tensions, heralding unexpected risk after US President Donald Trump this spring launched a series of tariff announcements on allies and competitors alike. But Gurria wasn’t particularly fazed by the threat of a trade war.
“We see that there are trade tensions,” he said. “And there has still not been a single shot fired in the sense that it is a lot of talk, but no tariffs actually imposed.” World leaders are currently in negotiations in attempts to avert the tariff impositions.
In March and April, Trump proposed sweeping tariffs on steel and aluminum imports worldwide, mostly in an effort to fight overcapacity in foreign (namely, Chinese) steel production that pushed down prices and cut the competitiveness of US steel producers. China produces about half the world’s steel, and production in both China and the US, as well as in other major producers like India and Japan, saw increases in March of this year.
For Gurria, punishing the consequences of overcapacity rather than addressing the overcapacity itself will get nations nowhere.
“I believe very strongly that if we do not go to the substance of the problem, which is overcapacity itself, rather than fighting only the consequences of that, then we will not make enough progress,” he said.
Message of Unity
A message of unity and common bonds, the OECD appears to hope, will drive home the message that there are alternatives to anti-immigrant, anti-globalist and protectionist agendas. The theme of this year’s summit is “What brings us together”.
This theme, the OECD’s website says, will focus on “moving from diagnosis to action, and shaping solutions to build these much-needed bridges,” by highlighting key concepts like inclusive growth, international cooperation and digitalization.
The week’s panels span a range of topics related to development and economics, from artificial intelligence and gender and LGBT rights to preserving the environment and the future of work. The OECD has 35 member states, most of whose economies are considered high-income and fully developed.
