World Economy

OECD Ups World Growth, Warns of Protectionism Risk

OECD expects ongoing improvements in business investment in the major economies should be reflected in stronger trade growth
OECD Headquarters in ParisOECD Headquarters in Paris

The Organization for Economic Cooperation and Development on Tuesday upgraded its global growth forecasts for this year and next year, while also warning over the risk presented by trade protectionism.

It revised up its forecast for 2018 global growth from 3.7% as recently as November to 3.9% with improvements expected in almost every country, except for Russia. Even larger improvements in the growth outlook were penciled in for 2019 with the global economy also expanding 3.9%, a level similar to pre-crisis normal rates, news outlets reported.

But its brighter outlook came with a major caveat in the wake of the US decision to slap import tariffs on steel and aluminum and the threat of retaliation by China, the European Union and others. The OECD, which groups 35 developed economies, called on the world’s major nations to avoid a dispute that could impede trade, demand, competition and, ultimately, the health of the global economy.

“Trade protectionism remains a key risk that would negatively affect confidence, investment and jobs,” it said. “Governments of steel-producing economies should avoid escalation and rely on global solutions.”

On its latest forecasts, the OECD said “stronger investment, the rebound in global trade and higher employment are helping to make the recovery increasingly broad-based.”

The OECD also warned of risks linked to the Group of 20 countries having total debt amounting to over 200% of economic output, and stock valuations being at their highest since the early part of the century. It also sees “tensions” as monetary policy normalizes, and said central banks need to communicate clearly to avoid market disruptions, Bloomberg reported.

Growing inequality was also highlighted in the report, which showed the richest 10% in OECD countries have 60% more disposable income now than in 1985, but the bottom 10% have only 20% more.

The fastest growth this year will be India, with expansion of 7.2%, followed by China at 6.7%, and Turkey and Indonesia both at 5.3%—all revised upwards since November.

 UK Slowest in G20

Britain will be the slowest growing major economy, expanding just 1.3%, with investment slowing “amidst continued uncertainty” about Brexit.

The UK economy will grow at a slower pace than any other major advanced or emerging nation this year, according to the OECD, BBC said.

Ahead of the Spring Statement, the think-tank raised its UK growth forecast to 1.3% in 2018 amid a strengthening global recovery. This is up from an earlier projection of 1.2%, but is the weakest in the G20.

The OECD said higher inflation in the UK would continue to squeeze household incomes. Weak business investment would also weigh on growth for the next two years amid uncertainty surrounding the Brexit negotiations. It left its prediction for UK growth in 2019 unchanged at 1.1%. This would be the joint-slowest expansion alongside Japan.

 Wage Growth

“Despite steady declines in unemployment, wage growth generally remains weak,” it said. However, there are signs that wage growth has begun to pick up in the US, Germany and Canada where measures of unemployment are at, or below, longer-term norms.

It expects ongoing improvements in business investment in the major economies should be reflected in stronger global trade growth.

“Prospects for investment are also somewhat stronger than previously expected in commodity-producing economies, reflecting the higher level of global commodity prices,” it said.

 Calls for Cooperation

Governments should work together to fix overcapacity in the steel markets and avoid a trade war, the OECD said. Tensions between the United States and its international trading partners, including the European Union and Japan, have intensified over the last couple of weeks over proposed tariffs on metals, CNBC reported.

President Donald Trump has decided to put a 25% tariff on imported steel and a 10% tariff on imported aluminum, arguing that these imports posed a threat to national security.

Western countries have been hit by a collapse in steel prices. Lower demand for the product and, until recently, rising production in China, have led to job losses in the industry and lower prices.

According to the OECD, the way to fix this overcapacity problem is by following international trade rules, namely those established under the World Trade Organization.

“Governments should avoid escalation and rely on global solutions to resolve excess capacity in the global steel industry,” it said.

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