The pace of the global economic expansion though the end of 2019 is expected to be faster than in 2017, however, there are tensions that could threaten strong and sustainable medium-term growth, according to the Organization for Economic Cooperation and Development (OECD).
The expansion “is strengthening, as robust investment growth, an associated rebound in trade, and higher employment drive an increasingly broad-based recovery,” said the OECD in its most recent interim economic outlook.
The OECD projects that the global economy will grow 3.9% in both 2018 and 2019, with private investment and trade increasing with the help of strong business and household confidence. It also said that inflation is expected to rise, but slowly, as labor markets tighten.
The report said a boost to short-term growth is expected from the new US tax law, and expected spending increases in the US, as well as expected fiscal stimulus in Germany. However, the OECD also points out financial sector risks and vulnerabilities, including risks posed by a rise in protectionism.
“Growth is steady or improving in most G20 countries and the expansion is continuing,” Alvaro Pereira, OECD’s acting chief economist, said in a release. “In this environment, an escalation of trade tensions would be damaging for growth and jobs … safeguarding the rules-based international trading system is key.”
The outlook suggests a range of policies that the OECD said would help sustain medium-term growth, such as urging countries to “add dynamism to structural reform efforts,” particularly in the areas of taxation and skills, and to increase employment and inclusive growth over the long term. It also said that the “fiscal stance in advanced countries should support, but not overstimulate, demand.”
In advanced and emerging G-20 economies, the growth prospects for the next two years have improved, said the OECD. Global trade and investment are growing faster, accompanied by strong job creation. It also said that fiscal stimulus in the US and Germany will help increase short-term growth.
“This is welcome news,” said Pereira. “However, there are also new tensions and new policy challenges. As the expansion progresses, monetary policy support will be reduced gradually, albeit at different speeds across major advanced economies.”
He said that the likelihood of faster hikes in US policy rates has already been reflected in “slightly tighter” short- and long-term financing conditions. “Such policy normalization is desirable, but could expose financial vulnerabilities from accumulated debt and high asset prices,” Pereira said, adding that “rising interest rates could create particular challenges for emerging market economies if capital flows and exchange rates were to become more volatile.”
The OECD’s projections within the G20 economies include:
- US GDP growth is projected to pick up to between 2.75% to 3% over 2018-2019. The new US fiscal measures could add between one-half to three-quarters of a percentage point to US GDP growth both this year and next.
- Growth in the euro area is set to remain “robust and broad-based” at between 2% to 2.25% over 2018-19. Accommodative monetary and fiscal policies, improving labor markets, and high levels of business and consumer confidence are all helping to boost demand.
- Growth in China surprised on the upside in 2017, aided by a strong rebound in exports, but is set to soften to just below 6.5% by 2019.
- GDP growth in Japan is set to remain at around 1.5% in 2018 before easing to around 1% in 2019.
- GDP growth in the UK is projected to ease to a little over 1.25% in 2018, and 1% in 2019. High inflation continues to weaken real household income growth and consumer spending, and business investment is slowing amid Brexit uncertainty.