OECD cuts forecast after dramatic slowdown in global trade
A dramatic slowdown in global trade, triggered by falls in demand in China and other emerging markets, is impacting the global recovery, the Organisation for Economic Co-operation and Development said Monday.
The Paris-based think-tank for 34 of mainly developed economies cut its latest growth forecasts, saying the world economy will expand by 2.9% this year and by 3.3% in 2016. This compares with earlier projections of 3% and 3.6% respectively.
The OECD says in its latest Economic Outlook that a key uncertainty stems from the unexpectedly sharp slowdown in world trade growth this year, to an estimated 2%.
Over the past five decades there have been only five other years in which global trade growth has been 2% or less (compared with 3.4% in 2014), all of which coincided with a marked downturn of global growth (Figure 1.7). In part, the current trade slowdown reflects weaker global GDP growth. But the slowdown has been more pronounced than might have been expected on the basis of past relationships with global output growth, even given the post-crisis decline in the elasticity of trade to output. In the early stages of the recovery, moderate trade growth largely reflected weak demand in the advanced economies, especially in the trade-intensive euro area (Ollivaud and Schwellnus, 2015). More recently, the weakness stems from the EMEs (emerging market economies). A substantial proportion of the overall slowdown in global trade growth this year relative to 2014 is accounted for by a decline in import volumes in the non-OECD economies (Figure 1.2), reflecting both weaker demand growth and a reduction in import intensity.
The OECD says that in the US, output remains on a solid growth trajectory, propelled by household demand, with GDP expansion expected to be 2.5% next year and 2.4% in 2017. The recovery in the Euro Area is set to strengthen, helped by accommodative monetary policy, lower oil prices and an easing of the pace of budget tightening. Euro Area activity is expected to grow by 1.8% in 2016 and 1.9% in 2017.
In Japan, recovery was derailed in 2015 by a sharp slowdown in demand from other Asian economies and sluggish consumption. Japan’s GDP growth is expected to accelerate to 1.0% next year, but to slow to 0.5% in 2017 due to the planned consumption tax hike.
Economic growth in China is projected to slow to 6.8% in 2015 and to continue to decline gradually thereafter, reaching 6.2% by 2017, as activity rebalances towards consumption and services. Achieving this rebalancing, whilst avoiding a sharp reduction in GDP growth and containing financial stability risks, presents significant challenges.
On Ireland, the economists revised 2015 GDP growth from the 5% it predicted in September to 5.6% and from 4% to 4.1% in 2016.
In other emerging economies, headwinds have generally increased, reflecting weaker commodity prices, tighter credit conditions and lower potential output growth, with the risk that capital outflows and sharp currency depreciations may expose financial vulnerabilities. Brazil and Russia have experienced recessions and will not return to positive growth in annual terms until 2017. By contrast, growth prospects in India remain relatively robust, with GDP growth expected to remain over 7% in the coming years, provided further progress is made in implementing structural reforms.
The Outlook calls for policies to support short-term demand, including on-going monetary and fiscal policy support in accordance with countries’ policy space. Collective action to increase public investment is essential and would increase growth without increasing debt-to-GDP ratios.
In the run up to the COP21 UN Climate Change Conference in Paris, a special chapter of the Economic Outlook calls for unequivocal action to address climate change, which is critical for long-term economic sustainability and healthy growth.
“World trade has been a bellwether for global output,” said Catherine Mann, OECD chief economist. “The growth rates of global trade observed so far in 2015 have, in the past, been associated with global recession.”