Waning Investments, Rising Debt May Derail Global Growth

Global economic growth is set to peak at an eight-year high next year as uninspiring investment and increasingly dangerous debt levels limit room for further improvement, the OECD said on Tuesday.

The global economy is on course to grow 3.6% this year before reaching 3.7% next year then ease back to 3.6 % in 2019, the Organization for Economic Cooperation and Development said in its latest outlook, Reuters reported.

The Paris-based policy forum nudged up its estimate for this year from 3.5% in its last forecasts dating from September, and left its 2018 projection unchanged. “Things look really good now, but unless we see some robust private sector activity and renewal of capital stock, generating higher real wages, we are not going to maintain the growth rates we see today,” OECD chief economist Catherine Mann told Reuters.

“There is still work to be done, we’re still resting a bit comfortably on the incoming data, which have been supported by fiscal and monetary policy,” she added.

Mann said that in particular companies were not investing enough to make up for the depreciation of existing assets, and even less so in making additional investments for further growth.

Despite weak private investment, households and companies were bingeing on cheap debt in many countries, exposing themselves to trouble as central banks tighten monetary policy.

Mixed Outlook

With its strongest growth in a decade, the eurozone was seen outpacing other major developed economies this year with 2.4% growth before easing to 2.1% in 2018 and 1.9% in 2019. In September, the OECD had foreseen growth of 2.1% this year for the euroland and 1.9% next year.

Marginally raising its estimates for the United States, the OECD forecast growth in the world’s biggest economy would pick up from 2.2% this year to 2.5% in 2018, boosted by an expected cut in corporate and income tax, before easing to 2.1% in 2019.

The OECD trimmed its forecast for Japanese growth this year to 1.5% and estimated growth would ease afterwards as budget tightening resumed. It left its forecast for next year at 1.2% and estimated growth would fall to 1% in 2019.

But it warned that government debt, the highest ever seen in an OECD member at 220% of GDP, posed a serious risk and required a broad-based plan to maintain confidence in Japan’s fiscal sustainability.

The OECD left its estimates for China unchanged, forecasting growth would slow from 6.8% this year to 6.6% in 2018 and 6.4% in 2019 as exports slow.

Gloomy Outlook for UK

The UK economy will weaken as the jobs boom ends and inflation hits household incomes. This is another blow for the UK, after sharp cuts to GDP forecasts were unveiled in the budget last week, OECD said.

OECD expects UK growth to worsen over the next two years. Its view is even more bleak than that of the Office for Budget Responsibility, presented last week. The OECD predicts that the UK economy will grow by 1.1% in 2019, compared to 1.3% in the OBR's view.

Brexit was not the primary cause for this negative outlook. Indeed the forecast assumed that a transition period would be secured between the UK and EU after 2019. Instead productivity, inflation due to the cheaper pound, and ballooning consumer debt were cited as the major causes for a slowdown in consumption.

The think tank said: “Private consumption is projected to remain subdued as higher inflation, pushed up by the past depreciation of sterling, holds back household purchasing power.” It said that in order to offset the impact of poor real wage growth consumers would spend their savings, and this would prop up consumption levels for a time.

Britain should seek the closest possible relationship with the European Union after Brexit if it wants to reduce the hit to its economy, OECD said.

Britain’s economy is already growing more slowly than many of the world’s rich nations, due to the impact of higher inflation since the referendum decision to leave the EU and uncertainty about the outcome of the Brexit talks.

“The major risk for the economy is the uncertainty surrounding the exit process from the European Union, which could hold back private spending more than projected,” the OECD said.