OECD warns Globaltrade tensions could create low-growth trap

OECD warns Globaltrade tensions could create low-growth trap

The world’s leading economies need to ease trade tensions and act decisively to prevent a descent into a low-growth trap from which it would be difficult to escape, the OECD warned on Thursday.Labelling the economic outlook as “increasingly fragile and uncertain”, the Paris-based international organisation forecast that Britain would fall into recession if it left the EU without a deal and eurozone growth would slow to close to zero. Evidence is accumulating that the effects of trade tensions are greater than previously thought, the OECD said, urging all countries to stop erecting tit-for-tat trade barriers and to fight the economic slowdown with a fiscal stimulus, where public finances allowed. The OECD downgraded the economic forecasts for almost all of the countries it examined, cutting its global growth projection for 2019 by 0.3 percentage points to 2.9 per cent, the weakest performance since the 2008-09 financial crisis. With little improvement foreseen in 2020 and big forecast downgrades, OECD chief economist Laurence Boone said: “The danger is that we get into a vicious circle of lower trade, investment and higher uncertainty.”She blamed multiple trade tensions, ranging from the US and China’s battle over tariffs to the skirmishes between South Korea and Japan on crucial goods for technology supply chains and the US threats to impose tariffs on European car imports. “The speed that trade tensions are materialising is worrying,” she said, adding that the effects “can be seen in how trade [volume] growth has collapsed”.The forecasts suggest that US economic growth will slow from 2.9 per cent in 2018 to 2 per cent in 2020, Chinese growth will decline from 6.6 per cent to 5.7 per cent over the same period and the eurozone will see its growth rate almost halve from 1.9 per cent to 1 per cent. “Collective effort is urgent to halt the build-up of trade-distorting tariffs and subsidies and to restore a transparent and predictable rules-based system that encourages businesses to invest,” the OECD said as it warned that companies would not want to invest in today’s uncertain climate. Economists fear that manufacturing woes could soon spread to consumer spending, bogging the services sector and the global economy down in a low-growth rut.
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In Britain, Ms Boone said that if the UK left the EU without a deal, “there was a high probability we get into recession”. The UK forecast for 2020 suggests only 0.9 per cent growth even if the country secures a deal; if Britain crashes out, the forecast is for a contraction of 2 per cent in that year alone. The OECD said that the predominant risk in its forecasts was that performance would be even weaker than its base case. It highlighted the possibility of a further escalation in trade tensions, a more rapid weakening of Chinese prospects, a no-deal Brexit and “significant financial vulnerabilities” as all being reasons for concern.The OECD praised the actions of central bankers in loosening monetary policy further to stimulate growth, but warned that Europe and Japan “have limited scope to ease monetary policy further but may face a renewed need to do so”.To make policy stimulus more effective, it called for governments to raise public capital spending in countries that had low deficits, low debt and an investment backlog. Noting that the Netherlands this week announced a fiscal stimulus along these lines, Ms Boone said: “We are seeing signs that this debate is progressing and some governments are addressing this issue.”


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