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OECD: strengthening global economy still vulnerable to risks

In their Global Interim Economic Outlook [1] for March 2017, the Organization for Economic Cooperation and Development (OECD) notes that global economic growth should pick up modestly next year, thanks to continuing and expected combined fiscal and structural initiatives in the major economies – most notably China, Canada, and the United States.

However, this growth is vulnerable to the multiple risks of rising protectionism, financial vulnerabilities, potential volatility from divergent interest rate paths, and disconnects between market valuation and real activity.

The OECD report explains that rising protectionism threatens the number of jobs that depend on trade, while the rapid growth of private sector credit and the relatively high level of indebtedness is a key risk in a number of emerging markets, especially in China.

Housing valuations are another matter of concern in some advanced economies, where the strength of financial market valuations appear disconnected from the outlook for the “real” economy, where the growth in consumption and investment remains sluggish.

While there has been a slightly more expansionary response in the Euro zone, the larger global economy, as portrayed by the OECD Outlook, remains beset by sub-par GDP growth and high inequality. This, says the OECD, calls for policy responses that advance inclusive growth in the context of increased economic integration.

For the United States, domestic demand is set to strengthen, helped by gains in household wealth and the gradual upturn in oil production. GDP is expected to pick up by 2.4% this year and 2.8% in 2018, supported by an anticipated fiscal expansion, despite higher long-term interest rates and a stronger dollar.

In Japan, fiscal easing and improvements to the women’s labor force participation will help GDP growth pick up this year to 1.2%.

Growth in China, however, is projected to slip: down to 6.5% this year and to 6.3% in 2018 as their economy makes a necessary transition away from a reliance on external demand and heavy industry toward domestic consumption and services.

The OECD stresses that governments need to manage risk, enhance economic resilience, and strengthen the environment to boost growth, with improvements in both productivity and inclusiveness. Focusing on policies that build structural elements into fiscal initiatives would reduce the burden on monetary policy in the advanced economies and help to boost trade, investment, productivity, and wages.

The full report is available as a downloadable PDF file here [2]. A presentation summarizing the report can be downloaded here [3].

The OECD’s Chief Economist is Catherine L. Mann [4].