World Economy

World Economy Has Hit a Plateau

Rising protectionism, emerging market vulnerability, politics and finance are seen as four main risks behind the tapering off in growth rates
While the tariff conflict may still be in its infancy,  global trade growth rate has almost halved.While the tariff conflict may still be in its infancy,  global trade growth rate has almost halved.

The global economy will continue to expand strongly in the coming years, but trade tensions could hinder investment and slow the pace of expansion, the Organization for Economic Cooperation and Development said.

In its latest interim outlook released Thursday, the OECD has projected global growth to settle at 3.7% in both 2018 and 2019. That level sits just below levels recorded prior to the financial crisis ten years ago, news outlets reported.

The recently appointed chief economist of the OECD, Laurence Boone, told CNBC's Charlotte Reed on Thursday that the world economy on the whole was "hitting a plateau" and there was evidence of increased divergence between different economies.

Boone highlighted rising protectionism, emerging market vulnerability, politics and finance as four main risks behind the tapering off in growth rates.

The OECD report has called for a gradual normalization of monetary policy but said it should be at a varying degree across different economies.

Speaking to CNBC, Boone said the normalization of policy in the United States was pushing the dollar upwards and creating a drag on emerging market economies.

"That obviously has an impact on how investors look at their funds and they are starting to repatriate from emerging markets to the US economy," she added.

Boone suggested that most emerging market countries were in the most part not at risk from the trend, with the likely exception of Turkey and Argentina.

On China, Boone said international trade tariffs were impacting the country "more or less in the same way", as Beijing had managed to steer a portion of the economy away from its previous reliance on exports.

The OECD's chief economist also highlighted Brexit as a major source of uncertainty and said it was "vital" that a deal is struck in order to maintain a close relationship between European Union and Britain.

Britain is due to leave the EU in March 2019 and issues remain unresolved over what kind of trading and customs arrangement will be put in place following that date.

Boone also highlighted Italy as a country to keep an eye on, citing the country's lack of growth and the high level of both corporate and public debt.

Warning on Trade War  

“Trade tensions are starting to bite, and are already having adverse effects on confidence and investment plans,” Boone said. “Trade growth has stalled, restrictions are having marked sectoral effects and the level of uncertainty on trade stances remains high. It is urgent for countries to end the slide towards further protectionism, reinforce the global rules-based international trade system and boost international dialogue, which will provide business with the confidence to invest.”

She added: “With tighter financial conditions creating stress on a number of emerging economies, especially Turkey and Argentina, a strong and stable policy framework will be key to avoid further turbulence.”

Emerging market stocks, broadly, have flipped into bear-market territory.

While the tariff conflict may still be in its infancy, the global trade growth rate has almost halved, with volume growth slowing sharply to 3% in the first half of 2018 from 5% last year, the OECD said.

A flood of tariffs and threats of more to come by the US administration have "already resulted in marked changes in trade flows", the organization said.

"Policy announcements have also adversely affected business sentiment and investment plans, reflecting uncertainty about the possible disruption to supply chains and the risk that restrictions may intensify. A further rise in trade tensions would have significant adverse effects on global investment, jobs and living standards," the OECD says.

Growth Outlook

The US 2019 forecast was slashed 0.1 percentage point to 2.7%. The OECD expects US GDP growth at 2.9% this year, slowing to 2.7% in 2019, a downgrade from its previous outlook. It expects the eurozone to grow 2% this year and 1.9% next year. China, meanwhile, is pegged for a 6.7% GDP growth rate in 2018, slowing to 6.4% next year.

Despite the caution, the report says Australia's outlook has remained steady, with gross domestic product to rise by 2.9% this year and 3% in 2019.

The OECD also lowered its growth projection for South Korea for this year from 3% to 2.7%. It also cut next year's outlook from 3% to 2.8%. The government already slashed its own outlook from 3 to 2.9% in July.

Investment banks are also voicing concerns. Goldman Sachs forecast Korea's growth at 2.9% in July but lowered it to 2.7% last month. LG Economic Research Institute said in a recent report, "The domestic economy is showing clearer signs of a slowdown than the global economy" and forecast Korea's economy will grow 2.8% this year and 2.5% in 2019.

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