OECD INTERIM ECONOMIC OUTLOOK Global growth weakening as some risks materialise 6 March 2019 Laurence Boone OECD Chief Economist http://www.oecd.org/eco/outlook/economic-outlook/ ECOSCOPE blog: oecdecoscope.wordpress.com
Key messages Growth is weakening particularly in Europe Vulnerabilities in China, Europe and financial markets could derail the global economy Governments should cooperate to reduce risks 2
Global growth is slowing with further signs of decoupling % 4.5 World GDP growth has started to slow q-o-q a.r. y-o-y % y-o-y United States Euro area 3.5 GDP growth is more dispersed 4.0 3.0 3.5 2.5 2.0 3.0 1.5 2.5 1.0 2016 2017 2018Q4 2016 2017 Q4 Note: LHS: Global growth in PPP terms. GDP figures for the fourth quarter of 2018 are based on available national accounts data plus 2018 estimates for Argentina, Australia, Russia, and Turkey. 3 Source: OECD Economic Outlook database.
Real GDP growth revised down OECD Interim Economic Outlook Projections Year-on-year, %. Arrows indicate the direction of revisions since November 2018. 2018 2019 2020 2018 2019 2020 World 3.6 3.3 3.4 G20 3.8 3.5 3.7 Australia 2.9 2.7 2.5 Argentina -2.5-1.5 2.3 Canada 1.8 1.5 2.0 Brazil 1.1 1.9 2.4 Euro area 1.8 1.0 1.2 China 6.6 6.2 6.0 Germany 1.4 0.7 1.1 India 1 7.0 7.2 7.3 France 1.5 1.3 1.3 Indonesia 5.2 5.2 5.1 Italy 0.8-0.2 0.5 Mexico 2.1 2.0 2.3 Japan 0.7 0.8 0.7 Russia 2.3 1.4 1.5 Korea 2.7 2.6 2.6 Saudi Arabia 2.0 2.1 2.0 United Kingdom 1.4 0.8 0.9 South Africa 0.8 1.7 2.0 United States 2.9 2.6 2.2 Turkey 2.9-1.8 3.2 Note: Difference in percentage points based on rounded figures. Dark red for downward revisions of 0.6 percentage points and more. Dark green and dark orange for, respectively, upward and downward revisions of 0.3 percentage points and more but less than 0.6 percentage points. Light green and light orange for, respectively, upward and downward revisions of less than 0.3 percentage points. The European Union is a full member of the G20, but the G20 aggregate only includes countries that are also members in their own right. 1. Fiscal years starting in April. 4
Trade growth continues to decelerate Euro area export volume growth % y-o-y 3-month moving average 7 Intra-EA Extra-EA 6 New export orders Manufacturing Index 2015-19 average = 100 115 China Euro area East Asia 110 5 4 105 3 100 2 95 1 0 90-1 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Dec-18 85 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Dec-18 Feb-19 Note: RHS: East Asia is a PPP-weighted aggregate of Japan, Korea, Malaysia, the Philippines, Thailand, Taiwan and Vietnam. Source: Markit; Eurostat; and OECD calculations. 5
Trade tensions and policy uncertainty take a toll on confidence and hiring intentions Confidence in OECD countries Firms hiring intentions PMI for employment Business confidence Normalised 2.5 2.0 1.5 1.0 0.5 Consumer confidence United States Euro area United Kingdom Index 100 = 2014-2019 average 108 106 104 102 0.0-0.5 100 98 2014-2019 average -1.0-1.5 96-2.0 94-2.5 2014 2015 2016 2017 2018 2019 92 2014 2015 2016 2017 2018 2019 Note: LHS panel: Data normalised over the 2014-2018 period; PPP-weighted aggregates of the OECD countries. Source: OECD Main Economic Indicators database; Markit; and OECD calculations. 6
VULNERABILITIES IN CHINA, EUROPE AND FINANCIAL MARKETS COULD DERAIL THE GLOBAL ECONOMY 7
A slowdown in China would weigh on growth across the world GDP growth impact of a negative demand shock of 2% pts in China %, difference from baseline in the first year % Trade Uncertainty 0.0-0.1-0.2-0.3-0.4-0.5-0.6 United States Euro area Germany Japan Commodity exporters East Asia Note: Simulated impact of a decline of 2 percentage points per year in domestic demand growth in China for two years. The uncertainty shock is a 50 basis point increase in investment risk premia in all economies. Policy interest rates are endogenous in all areas. Commodity exporters include Argentina, Australia, Brazil, Chile, Indonesia, Russia, South Africa and the other oil producers. East Asia includes Chinese Taipei, Hong Kong (China), Korea, Singapore, Vietnam and other East Asian countries. Regions are weighted using purchasing power parities. Source: OECD calculations. World 8
Slower credit growth may weaken the euro area further % 8 7 6 5 4 3 2 1 0 Sovereign bond yields 10-year government bond yield Germany France Italy Spain Credit growth Bank credit to non-financial corporations Italy Germany France Spain % y-o-y 7.5 5.0 2.5 0.0-2.5-5.0-7.5-10.0-1 2010 2012 2014 2016 2018 2019-12.5 2010 2012 2014 2016 2018 2019 Note: RHS: Credit growth of loans adjusted for sales and securitisation, non-financial corporations. Source: Thomson Reuters; and OECD calculations. 9
The UK economy has been weakening since the Brexit referendum Real GDP loss since the 2016 referendum Investment has declined Index 2016Q2 = 100 106 Germany, France and the United States United Kingdom: Actual United Kingdom: Pre-referendum OECD projections United Kingdom Index 2016Q2 = 100 109 108 OECD 105 104 1.7% 0.7% 107 106 105 103 104 102 103 101 102 101 100 100 99 2016 2017 2018 99 2016 2017 2018 Note: LHS: The green line is a GDP-weighted average of France, Germany and the United States. Source: OECD Economic Outlook database; and OECD calculations. 10
A combination of these risks could further weaken euro area growth Bilateral share of goods exports 2017 United Kingdom Italy Germany China Total exports in % of GDP (rhs) % of total exports % of GDP 50 100 40 80 30 60 20 40 10 20 0 0 Note: Black triangles represent the share of total goods export in % of GDP. Data as of 2016 for the Netherlands. Source: OECD International Merchandise Trade Statistics database; OECD Economic Outlook database; and OECD calculations. 11
Pressure on EMEs has eased but vulnerabilities persist 8 7 6 5 4 3 EME sovereign bond yield spreads have declined Turkey Argentina Global EMEs EMEs %% pts pts % pts 9 9 8 7 6 5 4 3 Record level of corporate bond repayments ahead Emerging market economies USD billion 1400 1200 1000 800 600 400 200 Due in year 3 Due in year 2 Due in year 1 Due within next 3 years (rhs) % of outstanding 50 40 30 20 10 2 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Mar-19 Note: LHS panel: Global EMEs stands for JP Morgan Emerging Bond Index (EMBI), which measures the yield spread between EMEs government bonds denominated in US dollars and US Treasuries. Source: Thomson Reuters; Çelik, S., G. Demirtaş and M. Isaksson (2019), Corporate Bond Markets in a Time of Unconventional Monetary Policy, Paris; and OECD Capital Market Series. 2 0 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 0 12
GOVERNMENTS SHOULD COOPERATE TO REDUCE RISKS 13
Interest rates are set to stay low for longer %, 15-day m.a. 3.0 2.5 2.0 1.5 1.0 0.5 Expected overnight interest rates for end-2019 Market expectations Euro area United Kingdom Japan United States % 3.5 3.0 2.5 2.0 1.5 1.0 10-year government bond yields United States Germany United Kingdom Euro area 0.0 0.5-0.5 2017 2018 2019 Source: Thomson Reuters; and OECD calculations. 0.0 2017 2018 2019 14
Public debt levels vary between countries but trend growth is low in most euro area countries Potential GDP per capita growth and public debt Public Debt in 2017, % of GDP More scope for structural reforms 180 160 140 Italy Greece Portugal More fiscal space 120 100 80 60 40 20 Belgium France Spain Austria Slovenia Finland Germany Ireland Slovak Rep. Netherlands Latvia 0 1 2 3 4 5 Potential GDP per capita growth in 2017-2019, % average annual change Note: Public debt is based on Maastricht criteria. Source: OECD Economic Outlook database; and OECD calculations. 15
Euro area: coordinate fiscal support and structural reforms to avoid a downturn and spur wages Impact of structural reforms and a coordinated 3-year fiscal stimulus in countries with fiscal space in the euro area GDP Real, difference from baseline, per cent % Fiscal stimulus in countries with fiscal space 0.9 Structural reforms only 0.8 % 0.9 0.8 Wages per employee Real, difference from baseline, per cent 0.7 0.6 0.5 0.4 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.0 2019 2020 2021 long-run 0.3 0.2 0.1 0.0 2019 2020 2021 long-run Note: The level of technical progress is gradually raised by 1% by the fifth year in all countries, and countries with fiscal space also increase government investment by 0.5% of GDP for three years. Euro area monetary policy is assumed to be set in a way that takes into account the eventual long-run improvement in output. Countries with fiscal space here include Germany, the Netherlands, Austria, Finland, Ireland, Slovak Republic, Slovenia, Estonia, Latvia, and Lithuania. Source: OECD calculations. 16
Key messages Growth is weakening particularly in Europe Uncertainty is weighing on confidence, trade, investment and employment prospects EU trade has slowed sharply, contributing to weaker-than-expected growth in Europe Vulnerabilities in China, Europe and financial markets could derail the global economy A sharper slowdown in China would weigh on global growth and could weaken growth in Europe further Political uncertainty in Europe is high and could weaken credit growth Challenges persist in financial markets and some EMEs Governments should cooperate to reduce risks Intensify multilateral dialogue globally and in Europe to reduce policy uncertainty Central banks should remain supportive but cannot and should not act alone Euro area governments should coordinate a fiscal and structural push 17