Developed Economies to Slowdown, But Asia Giants’ Prospects Improve

The world’s developed economies are set for a slowdown, although prospects for Asian giants China and India have brightened, according to leading indicators released Monday by the Organization for Economic Cooperation and Development.

Economic growth in the Paris-based research body’s 35 members accelerated in the three months through June after a weak start to the year, thanks to a surge in US activity that was partly driven by tax cuts and government spending increases, AFP reported.

However, the OECD’s gauges of future activity, based on data for July, suggests growth is set to steady in the US and Japan, while slowing in Europe.

“Composite leading indicators, or CLI, point to easing growth momentum in the OECD area as a whole,” the research body said.

In July, the CLI for the OECD fell further below the 100.00 mark that indicates growth is set for its long-term trend rate. The measure had been above that mark until April, and before May last fell below that level in August 2015.

The leading indicators are designed to provide early signals of turning points between the expansion and slowdown of economic activity, and are based on a variety of data series that have a history of anticipating swings in future economic activity. The changes in economic activity signaled by the indicators usually follow six to nine months after they are recorded.

Slowdown May Continue

The global economy last year enjoyed its strongest expansion since 2011, and is expected to slow only slightly this year. An August measure of global activity in the manufacturing and services sectors compiled by data firm IHS Markit fell to its lowest level since March.

The OECD’s indicators suggest that slowdown may continue into 2019, although they also pointed to accelerations in China and India that could be strong enough to offset a mild deceleration in rich countries.

With the economic expansion in the US now entering its 10th year, some policymakers have become more alert to signs of an eventual decline in activity, including movements in bond yields that have in the past foreshadowed recessions.

But while there are signs that global growth is coming off its recent peak, there are few that suggest that slowdown will be sharp.

Tax Reforms

Countries have used recent tax reforms to lower taxes on businesses and individuals, with a view to boosting investment, consumption and labor market participation, continuing a trend that started a couple of years ago, OECD said in a report last week.

Tax Policy Reforms 2018 describes the latest tax reforms across 35 OECD members, including Argentina, Indonesia and South Africa. The report identifies major tax policy trends and highlights that economic stimulus provided by fiscal policy, including to a large extent through tax policy, has become more significant.

Significant tax reform packages were introduced in Argentina, France, Latvia and the United States, with a strong focus on supporting investment and some measures designed to enhance fairness. Other countries have introduced tax measures in a more piecemeal fashion.

Across countries, the report highlights the continuation of a trend toward corporate income tax rate cuts, which has been largely driven by significant reforms in a number of large countries with traditionally high corporate tax rates.

The average corporate income tax rate across the OECD has dropped from 32.5% in 2000 to 23.9% in 2018. While the declining trend in the average OECD corporate tax rate has gained renewed momentum in recent years, corporate tax rate reductions are less pronounced than before the crisis.

“Among the countries that introduced significant corporate tax reforms were a number with high corporate tax rates, where tax reform was long overdue,” said Pascal Saint-Amans, director of the OECD Center for Tax Policy and Administration.

“While these corporate tax cuts have created some concerns of a ‘race to the bottom’, most of these countries appear to be engaged in a ‘race to the average’, with their recent corporate tax rate cuts now placing them in the middle of the pack. We will be closely watching how other countries respond to this trend in the future.”

Beyond corporate tax reform, the OECD identifies a number of common tax reform trends in this year’s report. Personal income tax cuts were introduced in many countries, primarily to alleviate the tax burden on low and middle-income earners.