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Global Growth Gloomy
World Economy

Global Growth Gloomy

Unemployment will continue to ravage the eurozone in 2016, as the bloc fails to reap the positive effects of low oil prices, interest rates and a weak euro, according to the OECD’s latest Interim Economic Outlook.

In stark contrast, Britain has been tipped to jump ahead with a 2.1% growth rate, faster than even the United States at 2%.

The world economy is likely to expand no faster in 2016 than in 2015, its slowest pace in five years. Trade and investment are weak. Sluggish demand is leading to low inflation and inadequate wage and employment growth.

The downgrade in the global outlook since the previous Economic Outlook in November 2015 is broadly based, spread across both advanced and major emerging economies, with the largest impacts expected in the United States, the eurozone and economies reliant on commodity exports, like Brazil and Canada.

Financial instability risks are substantial, as demonstrated by recent falls in equity and bond prices worldwide, and increasing vulnerability of some emerging economies to volatile capital flows and the effects of high domestic debt.

“Global growth prospects have practically flat-lined, recent data have disappointed and indicators point to slower growth in major economies, despite the boost from low oil prices and low interest rates,” said OECD chief economist Catherine L. Mann.

“Given the significant downside risks posed by financial sector volatility and emerging market debt, a stronger collective policy approach is urgently needed, focusing on a greater use of fiscal and pro-growth structural policies, to strengthen growth and reduce financial risks.”

The OECD projects that the global economy will grow by 3% this year and 3.3% in 2017, which is well below long-run averages of around 3¾%.  This is also lower than would be expected during a recovery phase for advanced economies, and given the pace of growth that could be achieved by emerging economies in convergence mode.

The US will grow by 2% this year and by 2.2% in 2017, while the UK is projected to grow at 2.1% in 2016 and 2% in 2017. Canadian growth is projected at 1.4% this year and 2.2% in 2017, while Japan is projected to grow by 0.8% in 2016 and 0.6% in 2017.

The eurozone is projected to grow at a 1.4% rate in 2016 and a 1.7% pace in 2017. Germany is forecast to grow by 1.3% in 2016 and 1.7% in 2017, France by 1.2% in 2016 and 1.5% in 2017, while Italy will see a 1% rate in 2016 and 1.4% rate in 2017.

 With China expected to continue rebalancing its economy from manufacturing to services, growth is forecast at 6.5% in 2016 and 6.2% in 2017. India will continue to grow robustly, by 7.4% in 2016 and 7.3% in 2017.

By contrast, Brazil’s economy is experiencing a deep recession and is expected to shrink by 4% this year and only to begin to emerge from the downturn next year.

Reforms Needed

The Interim Economic Outlook calls for a stronger policy response, changing the policy mix to confront the current weak growth more effectively. It points out that sole reliance on monetary policy has proven insufficient to boost demand and produce satisfactory growth, while fiscal policy is contractionary in several major economies and structural reform momentum has slowed.

The OECD says monetary policies should remain highly accommodative in advanced economies, until inflation has shown clear signs of moving durably towards official targets. In emerging market economies, monetary support should be provided where possible, taking into account inflation developments and capital market responses.

The Outlook suggests that a stronger fiscal policy response, combined with renewed structural reforms, is needed to support growth and provide a more favorable environment for productivity-enhancing innovation and change, particularly in Europe.

“With governments in many countries currently able to borrow for long periods at very low interest rates, there is room for fiscal expansion to strengthen demand in a manner consistent with fiscal sustainability,” Mann said. “The focus should be on policies with strong short-run benefits that also contribute to long-term growth. A commitment to raising public investment would boost demand and help support future growth,” Mann said.

In Europe, the surge in refugees, terrorist threats and unpopular austerity measures could lead to even more financial difficulties, pushing growth down even further.

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