The global economy looks set to post its best performance in seven years in 2018, a bonus for Australia which is already benefiting from this upswing.
But the Organization for Economic Cooperation and Development has questioned how sustainable this expansion is when business investment remains weaker than the average of past recoveries among OECD economies, news outlets reported.
"Short-term momentum is no guarantee of medium-term sustainable growth," the OECD warned in its interim economic outlook.
The OECD says short-term momentum is buoyed by a rebound in industrial production, consumer spending and investment since the final six months of 2016, while trade growth has recovered from a trade slump in late 2015/early 2016.
But it says interest rate support remains necessary to ensure the recovery is sustained. "The long period of low interest rates has boosted asset price valuations and created financial distortions that will be testing to resolve."
Risks of Raising Interest Rates
Interest rate setters face a “difficult balancing act” amid the threat of a potential housing market correction and risks to the wider economy from raising borrowing costs, according to an influential think tank.
OECD warned the UK was among a number of economies where sky-high house prices mean rate hikes could have worrying side-effects after years of rock-bottom borrowing costs.
Its comments come after the Bank of England signaled last week that a rate rise may be needed in the “coming months” to ease surging inflation caused by the Brexit-hit pound.
The pound hit its highest level against the US dollar since the Brexit vote after last week’s minutes of the bank’s September rates meeting hinted a rise could be on the cards as soon as November, although governor Mark Carney stressed in a speech on Monday that any increases would be gradual and limited.
The OECD said: “Authorities face a difficult balancing act in continuing to provide support while managing financial stability risks. In some advanced economies, including Australia, Canada, Sweden and the United Kingdom, house prices are elevated relative to rents, raising financial stability risks if rising interest rates were to trigger a housing market correction.”
Rates have been at historically low levels in a number of economies–standing at 0.25% in the UK, where rates have not risen for more than 10 years.
“The long period of low interest rates has boosted asset price valuations and created financial distortions that will be testing to resolve,” the OECD said.
The OECD predicts UK growth will slow sharply next year. The OECD stands by its previous economic forecasts for UK gross domestic product, predicting it to slow from 1.8% to 1.6% for 2017, before dropping to 1% in 2018.
Global Outlook
Although all leading economies are now recording positive growth, Catherine Mann, the OECD’s chief economist, urged governments to “curb your enthusiasm (because) strong and sustained medium-term global growth is not yet secured”, AP reported.
The OECD’s economic outlook shows upgrades to the 2017 growth forecasts in China, Russia and Europe excluding the UK with the world outlook also appearing stronger in 2018.
World growth should rise from a low of 3.1% in 2016, to 3.5% this year and 3.7% in 2018, the OECD forecast, with the US, the eurozone, Brazil and Russia contributing most to the improved global outlook.
The OECD has been surprised by the strength of the upswing, particularly in the eurozone. Mann said the short-term momentum in Europe stemmed from the European Central Bank’s success in loosening financial conditions and more stimulus coming from tax and public expenditure policies across the zone.
China’s predicted growth rate of 6.8% in 2017 and 6.6% in 2018 has been revised higher by 0.2 percentage points in both years and although India’s growth rate has been revised down, reflecting adjustment to its new goods and services tax, it is likely to remain the fastest growing large economy in the world.
Mann urged governments to prioritize public spending that will improve the capacity of economies to produce goods and services and raise employment in the future, including investment projects and childcare.
The OECD also urged countries to beef up their product market regulations to boost competition, especially in emerging economies, which foster productivity growth. “Sustained and inclusive growth depends on policymakers following through to meet expectations of their citizens,” the OECD said.
