According to the Organization for Economic Cooperation and Development (OECD)’s and Interim Economic Outlook published in March 2019, global growth is slowing, showing signs of decoupling, with greater concern for Europe than the US, which is experiencing a slight slowdown.

The slowdown has been faster than anticipated a few months ago; growth in Europe has been particularly disappointing, as trade growth both within the EU and with external partners has stalled.

Business and consumer confidence has plummeted in advanced economies as trade tensions persist, and high levels of policy uncertainty in Europe linger, while the pace of China’s slowdown continues to raise concerns.

Factors that support growth

• Eased financial conditions supported by major central banks’ decisions to pause monetary policy normalization
• Labour market resiliency, with wage growth slowly picking up, which supports household income and spending

There are external factors as well as internal weaknesses that threaten growth, however. Laurence Boone, OECD Chief Economist, points to three major factors affecting the revision:

• Continued uncertainty over trade policies even if the US and China conclude a trade agreement soon. President Trump’s mercurial economic policies mean that we cannot exclude the chance that other measures will be implemented later in 2019 or that new restrictions will be put in place in specific trade-sensitive sectors.
• Uncertainty over China’s outlook. Vulnerabilities in Chinese and European markets could derail the global economy. China’s measures to stimulate its economy may not be effective, and Chinese corporate debt poses risks to financial stability. Boone says that by taking direct trade and confidence effects into account, the OECD’s simulations show that a decline of 2 percentage points in the growth rate of demand in China for two years would lower global GDP growth by over 0.5 percentage point in the first year.
• Further weakening of the Chinese, German, Italian or the United Kingdom’s economies could quickly infect other European economies. As an OECD representative put it, “if China sneezes, we all catch a cold.” Also, the real costs of Brexit are beginning to show, with economic uncertainty having an impact on investment in the UK.

Governments must act now

The OECD recommends that governments intensify multilateral dialogue on trade, and coordinate “all levers of policy” to avoid a sharper downturn in the EU. Boone indicates that monetary policy normalization, which has been on pause in major economies due to rising uncertainty, weaker growth, and contained inflation, but he cautions that monetary policy “can and should not act alone”.

Instead, EU governments should take advantage of accommodative monetary conditions, while coordinating “fiscal and structural policies to revive growth both in the short and medium term.”

Boone further writes:

“A moderate fiscal stimulus in countries that have fiscal space, targeted at public investment, would lift growth during the time it takes for structural reforms to deliver their full effect. On the structural front, there is ample scope for reforms to encourage innovation and business dynamism in Europe by streamlining permits and licenses, improving the transparency of regulation and reducing barriers to entry in network industries, professional services and retail sector.

The coordinated fiscal and structural policy action would also benefit workers and give a necessary boost to wages. But more importantly, the coordinated action could lift confidence in governments’ capacity to reap the full benefits of the Euro area. Euro area governments would show, that by acting together they can lift growth and improve the lives of all. This would demonstrate that Europe is stronger than its individual member states.”

Further information and analysis can be viewed on this page of the OECD website.