As stock markets seem to be soaring, especially in the United States, growth forecasts announce that the global economy will barely reach levels above recession.
New gloomy expectations for the world’s economies were reported by the Organization for Cooperation and Economic Development (OCED).
In a climate of growing commercial tension, lower private demand and investment weighed down by uncertainty, global growth will remain at 2.9% this year and next year. That will be the lowest level since the Great Recession and almost half a point below the average of the last five years.
An adverse scenario, with downward corrections, of which the OCED has been warning for months and has found in its annual report on economic projections, published on Thursday.
For the first time, the Paris-based agency underlines that the slowdown does not respond to a “cyclical shock”, but to “structural changes” that governments have left unattended and that are divided into two groups:
1. Those that could already be cataloged as classics, such as commercial tensions, despite the recent signs of relaxation between Washington and Beijing, and,
2. Geopolitics and digitalization, which the entity places as “structural problems.
“These are worrying times and politicians should worry. Slow growth is here to stay because what it is keeping growth at low levels is fundamental changes in the ways our economies work,” said the OCED’s chief economist, Laurence Boone.
“Digitalization and geopolitics are structural changes that are underway in our economies,” says Boone at the beginning of the last OECD review of the year.
To both factors is added, he continues, that “trade policy and geopolitics are moving away from the multilateral order of the 1990s. It would be a mistake to consider these changes as temporary factors: they are structural and, in the absence of a clear political direction on these four issues, uncertainty will continue to loom over us, damaging growth prospects.”
The agency highlights the “lack of political direction” to try to mitigate its effects.
That is why, he insists, governments “must act quickly”, because “without clear guidance, the necessary public investment, companies will postpone investment decisions, with dire consequences for growth and the job. Not to make those investments now is to increase the long-term costs,” says Boone.
The outlook is bad, but the risk of recession remains distant, contrary to the grim prognoses that have been gaining predicament in recent months.
But the cold in the main engines of growth begins to be more than worrying: among the big economies, the slowdown is especially sharp in the eurozone, which will go from brushing 2% growth in 2018 to 1.2% this year and 1.1% in 2020, weighed down by its two main industrial centers, Germany and Italy – “to a large extent, reflecting the greater dependence on international trade” -; and the United States, which is expected to go from rubbing 3% to 2.3% in 2019 and 2% next year despite the good overall tone of consumption.
The Chinese economy, meanwhile, will continue its downward path under the mantra of the “soft landing” -although the slowdown could be more abrupt than expected-: by 2020 the growth will be below 6% for the first time in three decades, weighed down by a trade war with the US that adds an additional degree of pressure to both shores of the Pacific. All forecasts are based on current conditions, of course, but those conditions may change very soon, as both China and the United States have announced agreements on several issues related to what could finally be a much-needed trade agreement.
For now, in such a bleak picture, India emerges as one of the few good global news, with an expansion that – after last year’s difficulties, will recover by 6% in 2020.
The fiscal leverage as a temporary solution
Although it varies markedly between countries, the margin of central banks to relaunch growth is increasingly narrow.
Faced with this exhaustion, the club of the 36 most industrialized countries on the planet calls for a step forward in public investment, the one with the most resistance. “If growth and inflation slow down more than expected, monetary policy should continue to relax.
But that movement should be accompanied by countercyclical fiscal stimuli, added OECD technicians. “There is an urgent need for more daring actions to relaunch growth and governments must focus not only on the short-term benefits of fiscal stimuli but on long-term gains.”
The creation of national investment vehicles could help design plans to address market failures and take into account positive externalities for society as a whole.
The margin of action in fiscal policy fluctuates, much, from one nation to another. The differences are especially pronounced in Europe. The OCED explicitly cites three cases – Germany, the Netherlands and Sweden – of nations with public debt at relatively low levels and economic activity biting downwards, in which “additional stimuli could be implemented”, taking advantage of “long-term negative interests, which offer opportunities to face infrastructure shortages and strengthen long-term growth.
On the opposite side, the agency appeals to prudence in heavily indebted countries and in which the projections do not point precisely to a reduction of liabilities in the short and medium-term: Belgium, France, Italy or the United Kingdom, in addition to Japan and the USA are part of this group.
Portugal and Greece the debt is expected to fall, “the margin for discretionary fiscal policies is limited” and additional flexibility “could undermine the sustainability of the debt and reduce the fiscal space to combat future recessions.”
In all cases, the OCED calls for “greater coordination between the monetary and fiscal levers to deal with the slowdown at a time when inflation remains not only under control but at levels below desirable in almost all developed nations.