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OECD: ‘Secular Stagnation’ Will Dampen Global Growth
World Economy

OECD: ‘Secular Stagnation’ Will Dampen Global Growth

The world economy appears to be suffering a slowdown in growth that will stretch through the rest of the year and 2016, according to a report by the Organization for Economic Cooperation and Development.

Heightening concerns that a period of “secular stagnation” is about to dampen the prospects for global growth, the Paris-based think-tank said China’s economy was flagging and recent stock market turmoil had exposed the fragility of many emerging market economies, Reuters reported.

But the steady progress made by some of the largest developed economies, including Britain, the US and Germany was maintaining the global recovery.

Nevertheless it described the outlook for the next couple of years as one characterized by “puzzles and uncertainties” as the growth prospects for Japan and the uneven pace of growth among eurozone countries revealed a mixed and confusing picture.

It said: “The US recovery remains solid, but there are puzzles around developments in other major economies. Growth in the eurozone is improving, but not as fast as might be expected.

“Erratic data in Japan raise questions about the robustness of the recovery there. And growth dynamics in China are difficult to assess, with conflicting signals coming from different indicators.” It added: “This leaves the outlook clouded by important uncertainties.”

Economic Potential

The OECD, which counts the world’s richest nations among its membership, said in its interim economic forecast that the prospect of higher interest rates in the US and UK had exposed the vulnerability of emerging market economies to higher borrowing costs.

It urged the US Federal Reserve to maintain its course for higher interest rates, but called on its officials to signal that the pace of increases will be slow, allowing those countries that have borrowed heavily in dollars to adjust to the jump in costs.

It said there were also “increasing doubts about the medium-term growth of economic potential in advanced and emerging economies alike”.

This is likely to be seen as a clear reference to concerns that secular stagnation has become the over-arching feature of the major economies, restricting growth. The term, which has grown in popularity since it was adopted by former US Treasury adviser Larry Summers, depicts western nations as gripped by higher health and pension costs associated with ageing populations that increase the emphasis on saving at the expense of investment and improved productivity.

The UK is expected to remain on track to grow at 2.4% this year and 2.3% next year. But most countries covered by the report are likely to slow in 2016 from the OECD’s previous forecast in June.

Brazil is expected to be one of the hardest hit by the slowdown in China and by its exposure to higher borrowing costs following a US interest rate rise. It will suffer a bigger recession this year and remain in recession next year after a 1.8 percentage-point downgrade by the OECD in its 2016 forecast.

$7t Hit to World Economy

 

A sharp Chinese economic slump could wipe a mammoth $7 trillion off the world’s economy in the next two years, OECD said. Its economists also warned of the “significant” impact of a bigger-than-expected slowdown for China, which is struggling to hit a 7% growth target this year.

The OECD, which cut its growth forecasts for China, estimates that a 2 percentage point decline in domestic demand could knock 0.4% off global growth in 2016, and 0.5% in 2017. That spells a combined $7 trillion hit to the world’s economy, based on the World Bank’s $77.9 trillion estimate of global GDP last year.

Beijing is fighting hard to avoid the world’s second biggest economy stalling, with five interest rate cuts since last November and a devaluation of the yuan, which triggered a summer of turmoil in financial markets.

The OECD said China’s growth was “difficult to assess”, adding: “China’s authorities should use the room they have to provide further policy stimulus and avoid a sharp slowdown.”

Fed Hikes Pose Challenges

The World Bank warned Tuesday that monetary policy tightening by the Federal Reserve could spur a "perfect storm" of threats to growth and financial stability in developing economies, AFP reported.

Regardless of whether the Fed begins raising interest rates at this week's meeting or later, Bank economists said in a report that the shift in policy could pose huge challenges to so-called emerging and frontier economies that are particularly vulnerable.

It would come as both global economic growth and trade have turned down and sinking commodity prices have particularly hurt a number of developing economies, the report noted, and economic growth among EFEs is already the lowest since the financial crisis.

Many have trade and budget shortfalls, and their governments and companies have high levels of US dollar debt, that make them particularly vulnerable to tighter conditions in global markets and a stronger dollar.

In the worst case, the report said, capital flows to developing economies could dry up suddenly, creating "formidable policy challenges for vulnerable countries."

 

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