OECD Economic Outlook Filled With Worries

The OECD has warned that financial markets are running ahead of economic reality, but it may be the OECD’s economic forecasts that are too pessimistic.

Private sector global growth forecasts are being revised higher in the wake of strong business surveys in the first two months of the year in the major advanced nations and in Asia, while the OECD’s own data shows falling unemployment and rising inflation across the advanced world, AAP reported.

The strong February jobs growth in the US, reported on Friday, which puts the Federal Reserve on track to lift rates at its Wednesday meeting, contributes to the growing confidence about the strength of the world economy.

The OECD’s interim economic outlook, released last week, was filled with worries. Although growth would improve in 2017 and 2018, the pick-up was not enough to lift the global economy out of what the organization calls a “slow growth trap”.

“Persistent growth shortfalls have weighed on future output expectations, thereby holding back current spending and potential output growth. This has given rise to weak global trade and investment,” its report says.

Poor productivity is leading to weak income growth, particularly among poorer households, and holding back consumption growth. “Financial vulnerabilities and policy risks could derail the modest recovery,” says OECD chief economist Catherine Mann.

She dismisses the share market rally that followed US President Donald Trump’s election victory last November. In her presentation, Mann comments: “There’s a disconnect between the real economy and market valuation and one or the other is going to be found to be overbought.”

The Dow Jones index is up by 16% in the past four months while there have been similar gains in markets in Japan and Germany. The rise has been closer to 10% in Australia and the UK.

The OECD says the rise in equities has come at the same time as an increase in nominal rates, which it says should have been a negative for equities, while it says there has been little change in consensus forecasts for either corporate earnings or economic growth.

The most timely pointer to economic conditions is the series of monthly business surveys conducted around the world by business information group Markit (in Australia conducted by Ai Group). They show the manufacturing conditions globally are the best they have been since early 2011 while business conditions generally are at a three-year high.