After a years-long recovery from the Great Recession, the impressive rate of improvement may have peaked. And there is a danger that the pace could turn the other way.
The pessimistic assessment is from the Organisation for Economic Co-operation and Development (OECD). Its forecasts are carefully followed because of its long-term ability to assess the global economy and economic health by country.
The authors of the new “Interim Economic Outlook” wrote:
The expansion may now have peaked. Global growth is projected to settle at 3.7% in 2018 and 2019, marginally below pre-crisis norms, with downside risks intensifying.
Growth has become less broad-based, with prospects diverging across the major economies, especially among the emerging-market economies.
Policy support and strong job growth continue to underpin domestic demand, but some emerging-market economies are facing significant headwinds from rising financial market pressures.
The OECD has revised downward most of the expectations in its May report. The growth of the euro area, which was 2.5% last year, is expected to be only 2.0% this year and 1.9% in 2019. The growth rate of the United States, on the other hand, is expected to stay relatively strong, up from 2.2% in 2017 to 2.9% this year but 2.7% in 2019. At the same time, the world’s second largest economy, China, is expected to see a fall-off from a rate that has been above 7% for years, except for during the recession. Its rate of 6.9% in 2017 slips to 6.7% this year and 6.4% in 2019.
The OECD experts say government policy is the primary driver of the risk of further slowing:
Economic policies face several challenges amidst considerable uncertainty:
A gradual normalisation of monetary policy is needed, but to a varying degree across economies. Fiscal policy choices should be focused on measures that improve the prospects for sustainable and more inclusive medium-term growth. Any margins from stronger growth should be used to help build fiscal buffers.
Monetary and fiscal policy space needs to be restored gradually to provide scope for support in a future downturn.
Policy choices in many emerging-market economies should focus on restoring confidence and stability, and avoid harm to medium-term growth prospects.
Enhanced deployment of macro-prudential policies would strengthen financial resilience.
The government policies of many countries got the global economy into recession, helped a recovery and now threaten the improvement they triggered.
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