“The (OECD) Outlook identifies the trade conflicts as the principal factor undermining confidence, growth and job creation across the world economy, and underlines that continuation of trade restrictions and political uncertainty could bring additional adverse effects. While solid consumer demand has supported service sector output to date, persistent weakness in manufacturing sectors and continuing trade tensions could weaken employment growth, household income and spending.” (OECD, Sept. 19, 2019)
The OECD’s latest projections of slower global growth are consistent with the widespread pessimism emanating from economists and central banks.
And, not surprisingly, the recent downgrade in the OECD’s economic projections identify the US-China trade dispute and its negative transmission via weaker global manufacturing and capital investment, as the important catalyst behind increased investor uncertainty and slower international growth.
The latest OECD publication pulls no punches, as it declares that the global economy is facing increasingly serious headwinds which are entrenching slower economic growth.
The agency correctly concludes that monetary accommodation on its own cannot fully offset the many headwinds, and that fiscal stimulus will be required as well. This conclusion is not surprising since interest rates around the world are extremely low, and in some cases, already negative.
As it is, in the latest OECD projections global growth is projected to decelerate from 3.6% last year to 2.9% in 2019 and 3% in 2020. Economic deceleration is the dominating feature of the larger industrial economies as well as of the emerging market countries.
Despite relatively robust job markets, the projected growth deceleration is particularly harsh among the Euro Area economies and the United Kingdom.
In economic growth terms, the US economy, with Canada tagging along, are one of the fewer bright spots in this other wise dismal picture. Of course, relatively tight job markets in most of the industrial economies were expected to slow some economies anyway. But the current global slowing is coming too fast.
In fact, the projected 2% growth rate for the US economy next year and the 1.6% expansion in Canada, are not too far from expectations of full capacity growth rates.
While China’s economy is clearly being hurt by the trade war, it is offsetting much of the negative effects by boosting domestic spending using both monetary and fiscal policy tools.
Accordingly, China’s economy is projected to expand 6.1% this year and 5.7% in 2020. While these projected growth rates for China may seem admirable, they are still considerably slower that last year’s 6.6% economic expansion.
India’s economy is also being severely hurt by the weaker global environment, and its growth rate is projected to slow to 5.9% in 2019 and 6.3% in 2020 compared with 6.8% growth last year.
Of course, there are specific country issues also overlaying this broad slower growth environment.
For example, Turkey's economy is projected to shrink this year and rebound a bit in 2020. The Turkish economy contracted 1.5% in the second quarter of this year, as a currency crisis last year devalued the lira nearly 30% against the US dollar.
Turkey’s currency crisis was driven by concerns over the central bank's independence and the deteriorating ties between Turkey and the US. International problems drove Turkey’s inflation to 15% in August, limited its corporations’ ability to service foreign debt, and escalated the bad loans in its banking sector.
In Argentina the economy is projected to continue contracting in 2019 and in 2020 after shrinking 2.5% last year. The country’s economic authorities are struggling to revive growth after being rattled by a currency crisis and steep inflation.
In August of 2019 the inflation rate in Argentina was 54%. Argentina has pledged tighter monetary policy to rein in inflation and raised interest rates to as high as 65% to support its currency.
The OECD’s bleak projections for Argentina underscore that the country is in dire economic and cannot turn around overnight.
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