The OECD has cut its economic growth forecasts for 2015 and 2016, warning of a dramatic slowdown in Brazil and a global outlook clouded by risks in China. It also called on the US Federal Reserve not to raise its benchmark rate at its policy meeting today. A rise would the the first since 2006.

 

The Organisation for Economic Cooperation and Development, which had already downgraded its economic forecasts three months ago, trimmed its 2015 growth forecast to 3.0% from 3.1% and the 2016 forecast to 3.6% from 3.8%.

The combination of a sharp contraction in China and a shock in the financial markets could derail the global recovery, the OECD has cautioned.

“The key risk to global growth is a larger than expected slowdown in China. Combined with financial turmoil, potentially exacerbated by the first tightening step in US monetary policy, this would have serious repercussions on the global economy,” the think-tank for 34 mainly developed country governments warned .

A decline in the growth rate of China’s domestic demand by two%age points for two years, combined with a reduction by 10 per cent in global equity prices, would reduce global growth by half a%age point both in 2015 and in 2016.

In its latest Interim Economic Outlook the OECD says: "A key puzzle in the short-term outlook centres on China, where recorded growth has held up well, but some indicators point to a slower underlying pace of economic activity. The marked slowdown in Chinese import demand has important spillover effects on global growth, particularly in emerging economies with close trade links to China, and those that depend on commodities. India is expected to be the fastest-growing major economy over the coming two years, while the outlook is weaker for many commodity-exporting nations, with Brazil experiencing a deep recession."

“Global growth prospects have weakened slightly and the outlook is clouded by important uncertainties,” said Catherine L. Mann, OECD chief economist. “Emerging economies have vulnerabilities that could be exposed by rising US interest rates and/or a sharper-than-expected slowdown in China, giving rise to financial and economic turbulence that could also exert a significant drag on advanced economies. Continued policy stimulus is warranted to support global demand, but the mix of policies will differ by country, and choices need to be consistent with financial stability and reviving long-run growth.”

The OECD projects that the US will grow by 2.4% this year and by 2.6% in 2016, while the UK is projected to grow at 2.4% in 2015 and 2.3 per cent in 2016. Canadian growth is projected at 1.1% this year and 2.1% in 2016, while Japan is projected to grow by 0.6% in 2015 and 1.2% in 2016.

The euro area is projected to grow at a 1.6% rate in 2015 and a 1.9% pace in 2016. Growth prospects differ widely among the major euro area economies. Germany is forecast to grow by 1.6% in 2015 and 2% in 2016, France by 1% in 2015 and 1.4% in 2016, while Italy will see a 0.7% rate in 2015 and 1.3% in 2016.

China is expected to to grow by 6.7% in 2015 and 6.5% in 2016. India will grow by 7.2% in 2015 and 7.3% in 2016. Brazil’s economy is expected to shrink by 2.8% in 2015 and then by an additional 0.7% rate in 2016.

This week in its latest Economic Survey of Ireland, the OECD said the Irish economy is projected to grow by around 5% in 2015 and 4% in 2016.