World Economy
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OECD Says Governments Failing to Revive Growth

OECD Says Governments  Failing to Revive GrowthOECD Says Governments  Failing to Revive Growth

The global economy is slipping into a self-fulfilling "low-growth trap" where ultra-loose monetary policy risks doing more harm than good, the Organization for Economic Cooperation and Development warned.

In a highly critical editorial in the OECD's latest Economic Outlook, rich world governments bear the brunt of the blame for failing to revive demand and failing to overhaul their economies in the wake of the financial crisis in 2008, Bloomberg reported.

According to the Paris-based group, which advises its 34 member countries, too much of the burden of lifting growth has been left to central banks. After pushing interest rates below zero and pumping money into their economies through asset purchases, they are starting to see diminishing returns and their actions could even generate financial-market volatility.

"Monetary policy has been the main tool, used alone for too long," OECD Chief Economist Catherine Mann said in the semi- annual report released Wednesday. "In trying to revive economic growth alone, with little help from fiscal or structural policies, the balance of benefits-to-risks is tipping." Mann also said that "negative feedback loops are at work."

Lack of demand, global uncertainties and slow reform progress are deterring investment, while trade growth remains too weak, she said.

"Monetary policy cannot revive near and long-term growth by itself, and distortions are increasing," the OECD said. Ultra- low and negative rates have stressed bank profitability and created financial strains for pension funds and insurers, while becoming "less potent" in stimulating consumption, it said.

Recovery to Stall

The worldwide recovery is set to stall this year, with output growing 3%. That forecast is unchanged from the organization's Feb. 18 estimate and it would match the pace seen in 2015. Expansion should accelerate to 3.3% next year, the OECD said.

"Fiscal policy must be deployed more extensively and can take advantage of the environment created by monetary policy," Mann said in her editorial introducing the report. "Governments today can lock in very low interest rates for very long maturities to effectively open up fiscal space."

The OECD's message echoes the mantra of European Central Bank President Mario Draghi, who has long called for governments to do more to stimulate growth. After the ECB's April policy meeting, he said that "in order to reap the full benefits from our monetary policy measures, other policy areas must contribute much more decisively."

US gross domestic product is now expected to expand 1.8% this year instead of the 2% predicted in February. The 2017 forecast is unchanged at 2.2%.

Brexit

Brexit would have a "substantial" impact on the global economy triggering turmoil in the world stock markets, the OECD warned.

It said fears over a potential Brexit have already knocked growth in the UK economy. With just 23 days until the referendum, the think-tank is ramping up its warnings about the risks of leaving the EU, saying that if the UK voted to leave, there would be a "significant impact" on Europe and the rest of the world.

It said: "A decision to exit would result in considerable additional volatility in financial markets and an extended period of uncertainty about future policy developments, with substantial negative consequences for the United Kingdom, the European Union and the rest of the world."

Trend May Worsen

Echoing comments from the World Bank and International Monetary Fund, the OECD warned of a dangerous slowing of global growth, and the trend may worsen.

According to the OECD, firms are too cautious to invest, are holding back innovation and productivity. As a result, households are getting more pessimistic about jobs and the future. The ensuing weaker consumer spending then feeds back into pessimism among companies, creating a vicious cycle.

Elsewhere, the European economic recovery has failed to gain much traction while Japan remains sluggish. And emerging markets are struggling to deal with volatile currencies, high debt and the crash in prices for goods they export—Brazil and Russia, for example, are in deep recession.

The OECD also said that it expects Italy's gross domestic product to rise 1% this year and 1.4% in 2017, standing by the forecasts it made in February.

 

Financialtribune.com