Trade tensions cloud best global growth outlook in 7 years -OECD

Global growth forecast raised to 3.9% for 2018, 2019

18:36 March 13, 2018

PARIS: Trade tensions are threatening the best global economic growth outlook in seven years, the OECD said on Tuesday, adding that four US rate rises are likely this year as tax cuts stoke the world’s biggest economy while Brexit will drag on Britain.

While broadly more optimistic than only a few months ago, the Organisation for Economic Cooperation and Development warned a trade war could threaten the outlook, and forecast that UK growth would lag all G20 countries due to Brexit uncertainties.

Updating its outlook for the G20, the OECD, which groups 34 of the world’s leading economies, raised its global growth forecast for 2018 and 2019 to 3.9 per cent — the highest since 2011 — from a previous estimate of 3.6 per cent for both years.

The higher forecast was in part due to expectations that US tax cuts would boost economic growth there, it said.

“We think the stronger economy is here to stay for the next couple of years,” acting OECD chief economist Alvaro Pereira told Reuters. “We are getting back to more normal circumstances than what we’ve seen in the last 10 years.” Rebounding global business investment would keep global trade growth at about 5 per cent this year, the OECD forecast.

However, it said the global economy was vulnerable to an eruption of trade tensions after the Trump administration imposed import tariffs on steel and aluminium, a move that is expected to prompt retaliation from Europe and others.

“This could obviously threaten the recovery. Certainly we believe this is a significant risk, so we hope that it doesn’t materialise because it would be fairly damaging,” Pereira said.

Fiscal easing

The OECD forecast the US economy would grow 2.9 per cent this year and 2.8 per cent in 2019, with tax cuts adding 0.5-0.75 percentage points to the outlook in both years.

Against that backdrop, the Federal Reserve would probably have to raise interest rates four times this year as inflation picks up, Pereira said. Previously the OECD had estimated three hikes would suffice this year.

With tax cuts boosting the economy this and next year, the OECD forecast the upper bound of the target federal funds rate could reach 3.25 per cent by the end of 2019 from 1.5 per cent currently.

Britain was seen missing out on the global upturn, lagging all other G20 countries with growth of only 1.3 per cent this year. That was higher from a November forecast of 1.2 per cent due to the broader global improvement.

With Britain due to leave the European Union next year, its economic growth was seen easing to 1.1 per cent in 2019, unchanged from the OECD’s November estimate.

The OECD said high inflation would eat into UK household income while business investment would slow in the face of uncertainty over Britain’s future relationship with the EU.

In contrast, stronger growth in France and Germany boosted the outlook for the broader euro zone to 2.3 per cent for this year and 2.1 per cent in 2019. Previously, the OECD had forecast growth of 2.1 per cent and 1.9 per cent respectively.

Fiscal easing in Germany’s coalition agreement was seen lifting growth in the euro zone’s biggest economy to 2.4 per cent this year (+0.1 percentage point) and 2.2 per cent in 2019 (+0.3).

President Emmanuel Macron’s social welfare, tax and labour market reforms would help France narrow the gap with Germany, with growth forecast at an 11-year high of 2.2 per cent (+0.4) before easing to 1.9 per cent in 2019 (+0.2).

With the euro area economy resilient, rising inflation would allow the European Central Bank to reduce its bond purchases gradually this year and subsequently phase out its negative interest rate policy, the OECD said.


UK nudges up 2018 growth forecast

LONDON: Britain has nudged up its official forecast for economic growth in 2018 while the outlook for subsequent years was unchanged or slightly worse, finance minister Philip Hammond said on Tuesday as he delivered an update on the economy. 7 The country’s official budget forecasters now expect gross domestic product will grow by 1.5 per cent in 2018, compared with a forecast of 1.4 per cent made in November.

Growth forecasts in 2019 and 2020 were 1.3 per cent for both years, unchanged from the November forecast.

By 2021 the growth forecast was 1.4 per cent, compared with a previous forecast of 1.5 per cent. The forecast for 2022 was 1.5 per cent, compared with 1.6 per cent in November.

— Reuters