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News : Global Economy Last Updated: Jun 8, 2015 - 8:33 AM

US and world economies slowing in 2015 — OECD
By Michael Hennigan, Finfacts founder and editor
Jun 4, 2015 - 3:29 AM

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The Organisation for Economic Co-operation and Development on Wednesday slashed its forecasts for global growth, as it warned that weak investment and disappointing productivity risk is keeping the world economy stuck in a “low-level” equilibrium.

In March, the OECD projected 4% global economic growth for 2015. On Wednesday, in its latest Economic Outlook, the Paris-based think-tank for 34 mainly developed country governments, slashed its forecast to 3.1% — which would be less than the 3.3% growth the world saw last year. The downgrade compares with last November’s forecast of 3.7%.

The OECD said that the slowdown is likely to be temporary as it forecasts global growth to rise to 3.8% in 2016 but it also warns that hopes of a swift recovery could be evaporate again, as they have in the past.

“The world economy is muddling through with a B-minus average, but if homework is not done . . . a failing grade is all too possible,” said Catherine Mann, chief economist.

The Outlook says increases in capital spending are needed to push economies onto a higher growth path. For policy makers, translating investment into sustained growth also requires paying attention to low-wage workers, as well as tackling the consequences of rising inequality for education, a key factor undermining growth in the longer term.

"This Outlook takes a detailed look at investment, concluding that the slow rate of private investment is largely explained by subdued (actual and expected) demand, both at home and globally. This demand weakness has hindered investment growth, which in turn has held back employment, wages, and consumption. On the supply side, sluggish investment has undermined the rate of growth of potential output — the capacity of economies to increase living standards, make good on future obligations to citizens, and repay debt — via a slower rate of increase of the capital stock and a slowdown in the diffusion and embodiment of technical change. The world economy remains stuck in a low-level supply-demand equilibrium environment...At least some of what we see as needed for such a jump to a high-level equilibrium is in prospect, given macro-policies and global demand balance. In our projections, fixed investment growth in the OECD region picks up to 4% next year, the highest rate since the crisis," Mann added in an editorial.

US GDP growth is projected to be 2.0% in 2015 and 2.8% in 2016, a downward revision from the November 2014 forecast of 3.1% this year and 3.0% in 2016. While the stronger dollar and adverse weather weighed on growth in early 2015, unemployment continues to fall. Supportive monetary policy and lower oil prices should continue boosting demand.

Output in the Euro area is expected to rise by 1.4% this year and 2.1% in 2016, more than forecasted in the previous Outlook, when the projections were 1.1% for 2015 and 1.7% for 2016. Bolder-than-expected monetary easing by the ECB has been accompanied by substantial depreciation of the euro, which should reinforce the positive demand effect of a pause in fiscal consolidation and the drop in oil prices.

Germany to grow by 1.6% in 2015 and 2.3% in 2016; France is projected at 1.1% and 1.7%; UK by 2.4% and 2.3%; Italian output is projected to grow by 0.6% in 2015 and by 1.5% in 2016; Spain is forecast to grow by 2.9% and 2.8%.

Irish GDP
is forecast at 3.5% and 3.3% while the fiscal budget deficit will be at -2.5% and -1.9% of GDP.

Japanese growth is projected at 0.7% in 2015 (compared with 0.8% in the previous Outlook) and 1.4% in 2016 (1.0% previously). Lower oil prices, stronger exports reflecting the weaker yen and real wage gains are among the factors driving the recovery.

In China, the 2015 GDP growth forecast has been revised down to 6.8%, from 7.1% in the November Outlook, and to 6.7% from 6.9% for 2016. The deceleration reflects the restructuring underway in the Chinese economy as services replace manufacturing and real estate investment as the main driver of growth.

Growth in India is expected to remain strong and stable in 2015 (at 7.3%) and 2016 (7.4%). The recessions in Russia and Brazil are projected to give way to low but positive growth in 2016.

“To move from a “B-minus” grade to an “A” means boosting investment in order to create jobs and stimulate consumption”, said Catherine Mann. “It means putting in place structural policies to raise productivity and encourage competitive markets as part of a package combining monetary and fiscal policies that deliver adequate demand growth and reduce policy uncertainty.”

In the US on Wednesday, the Labor Department reported that payrolls grew in 50 US metro areas with a population of 1m or more in April compared with a year earlier. The biggest rise occurred in Silicon Valley’s San Jose-Sunnyvale-Santa Clara metro area, where payrolls grew 6% while in the Detroit area jobs fell by 2.7%.

Reuters reported that US economic activity expanded from early April to late May and growth was expected to continue at a "modest" to "moderate" pace against the backdrop of declining oil and gas investment, the Federal Reserve also said on Wednesday.

In its Beige Book report of anecdotal information on business activity collected from contacts nationwide, the US central bank said most of its regional Fed banks reported that while manufacturing had either held steady or increased, growth was tempered by the downturn in the oil and gas industry.

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