Global Economy Stuck in Low Growth Trap

The global economy is expected to grow around 3.5% in 2018 compared to 3% in 2016, but the modest recovery may be derailed, the Organization for Economic Cooperation and Development warned in its latest economic outlook report.

The OECD has noted that confidence has picked up but consumption, investment, trade and productivity remain weak, Reuters reported.

"Disconnect between financial markets and fundamentals, potential market volatility, financial vulnerabilities and policy uncertainties could, however, derail the modest recovery," the OECD said in its report Tuesday.

Its forecasts remained broadly unchanged from its November report, however, both the US and the eurozone saw minor downgrades.

The OECD is particularly concerned with political uncertainty in Europe amid rising support for anti-establishment parties. "Uncertainties in many countries about future policy actions and the direction of politics are high," the OECD noted.

"Many countries have new governments, face elections this year or rely on coalition or minority governments. More generally, falling trust in national governments and lower confidence by voters in the political systems of many countries can make it more difficult for governments to pursue and sustain the policy agenda required to achieve strong and inclusive growth," it added.

In Europe alone, there are elections in the Netherlands, France, Germany and potentially in Italy as well—four of the biggest eurozone economies.

Furthermore, as central banks begin raising interest rates, the OECD warns that this could increase the volatility in exchange rates and lead to wider financial turmoil.

China is predicted to moderate its growth rate a touch from 6.7% last year to 6.3% in 2018, a rate now comfortably below that of India which has taken the mantle of fastest growing large economy and is predicted to expand 7.7% in 2018, up from 7% last year.

Britain's economy will grow by 1.6% this year, the OECD said as it revised up its forecast amid resilient consumer spending and action by the Bank of England and government following the Brexit vote.

The OECD warned growth would be hit by "uncertainty" about Britain's future trading relationship with the EU and rising inflation, which last week was pushed to a two-and-a-half-year high of 1.8% by the collapse in the pound following last year's referendum.

The OECD also warned "rapid house price increases" in Britain could herald a future economic downturn.

Market Pressures

"The recent interest rate rises have been associated with sizeable exchange rate movements, with the US dollar appreciating rapidly against the euro and yen, and a number of emerging market currencies have faced market pressures. Financial market expectations imply that a large divergence in short-term interest rates between the major advanced economies will open up in the coming years. This raises the risk of financial market tensions and volatility, notably in exchange rates, which could lead to wider financial instability," the OECD said.

Another big concern is the increasingly protectionist rhetoric in advanced economies. For instance, the new US administration has signed orders to withdraw from some of its trade deals in an attempt to protect jobs at home.

"A rollback of existing trade openness would be costly, with a significant share of jobs in many countries linked to participation in global value chains. An increase in trade barriers in the major global trading economies—Europe, the United States and China—roughly equivalent to an average increase of tariffs to the bound tariff rates in 2001, the year when the trade negotiations under the Doha Development Round started, would have a major adverse impact on trade and GDP, particularly for those economies that imposed new trade barriers," the OECD said.