Trade Wars Taking Toll on Global Growth

OECD blames dimming economic outlook on trade tensions, policy uncertainty.

The global economy is facing “increasingly serious headwinds” as slow growth is becoming “worryingly entrenched,” and downside risks continuing to mount, according to the Organisation for Economic Co-operation and Development (OECD).

The OECD’s September Interim Economic Outlook said both advanced and emerging economies’ economic prospects are weakening, and global growth could get stuck at persistently low levels without firm policy action from governments.

“The uncertainty provoked by the continuing trade tensions has been long-lasting, reducing activity worldwide and jeopardizing our economic future,” said OECD Chief Economist Laurence Boone in a statement. “Governments need to seize the opportunity afforded by today’s low interest rates to renew investment in infrastructure and promote the economy of the future.”

According to the OECD, escalating trade wars are increasingly eroding confidence and investment, and are endangering already weak global growth forecasts. As a result, the organization revised downward its growth forecasts for the global economy to 2.9% in 2019 and 3% in 2020, from May’s forecast of 3.2% and 3.4% growth for 2019 and 2020 respectively. It would be the weakest annual growth rates since the financial crisis, and the OECD said downside risks are continuing to rise.

Global growth forecasts have been steadily declining since trade wars erupted between the US and China, and are down sharply from May 2018 when the OECD forecast global growth of approximately 4% for 2019 and 2020. The forecast covers all G20 economies, and includes downward revisions to projections from the previous Economic Outlook in May for almost all countries, particularly the ones with the most exposure to the recent decline in global trade and investment.

Trade conflicts are the main factor undermining confidence, growth and job creation across the world economy, said the OECD, which added that a continuation of trade restrictions and political uncertainty could bring additional adverse effects. It said that although strong consumer demand has supported service sector output, persistent weakness in manufacturing sectors and continuing trade tensions could weaken employment growth, household income, and spending.

The report also cited “substantial uncertainty” about the timing and nature of the UK’s departure from the European Union, particularly concerning a possible no-deal scenario, which the OECD said could push the UK into recession in 2020. Other risks the report cited include the slowdown of the Chinese economy, and “significant financial market vulnerabilities” from the tension between slowing growth, high debt, and deteriorating credit quality.

The OECD is calling on central banks to remain accommodative, but emphasized that the effectiveness of monetary policy could be bolstered if accompanied by stronger fiscal and structural policy support. It said fiscal policy should play a more prominent role in supporting the economy by taking advantage of very low long-term interest rates in order for wider public investment to support near-term demand and future growth.

“Growth is languishing, but there is a lot that public policy can do,” Boone wrote in a recent blog post. “This includes restoring confidence in the collective ability to establish trade rules which are clearer, more transparent, and afford more protection to citizens,” she said, adding that “taking advantage of the predictable rates provided by monetary policies to boost investment, and with it growth and the jobs of tomorrow. It can be done. It urgently needs to be done.” 


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