OECD adds major trade war caveat to optimistic global outlook

March 13, 2018 - The global economy will grow close to 4 percent this year and next, better than previously anticipated, according to the OECD, which added a warning that a trade war could roll back the gains seen in recent years.

Upgrading its forecasts, the Paris-based group in part cited U.S. tax cuts for the better numbers. It sees the world economy expanding 3.9 percent in both 2018 and 2019, the strongest since 2011. That’s up from 3.7 percent and 3.6 percent respectively compared with its November projections.

But its brighter outlook came with a major caveat in the wake of the U.S. decision to slap import tariffs on steel and aluminum and the threat of retaliation by China, the European Union and others. The OECD, which groups 35 developed economies, called on the world’s major nations to avoid a dispute that could impede trade, demand, competition and, ultimately, the health of the global economy.

“Trade protectionism remains a key risk that would negatively affect confidence, investment and jobs,” it said on Tuesday. “Governments of steel-producing economies should avoid escalation and rely on global solutions.”

A full-blown trade war could cost the global economy $470 billion by 2020, according to analysis by Bloomberg Economics. That hit is based on an extreme scenario of levies, but one that BE says is “no longer an impossible one.”

On its latest forecasts, the OECD said “stronger investment, the rebound in global trade and higher employment are helping to make the recovery increasingly broad-based.”

It said that the tax cuts in the U.S. will boost business investment and could add as much as 0.75 percentage point to growth this year and next in the world’s largest economy. The outlook for 2018 U.S. expansion was upgraded to 2.9 percent from 2.5 percent, and the euro area was lifted to 2.3 percent from 2.1 percent. The better global growth will be accompanied by a “modest” pickup in inflation, it said.

The OECD also warned of risks linked to the Group of 20 countries having total debt amounting to over 200 percent of economic output, and stock valuations being at their highest since the early part of the century. It also sees “tensions” as monetary policy normalizes, and said central banks need to communicate clearly to avoid market disruptions.

Growing inequality was also highlighted in the report, which showed the richest 10 percent in OECD countries have 60 percent more disposable income now than in 1985, but the bottom 10 percent have only 20 percent more.

The fastest growth this year will be India, with expansion of 7.2 percent, followed by China at 6.7 percent, and Turkey and Indonesia both at 5.3 percent -- all revised upwards since November. Britain will be the slowest growing major economy, expanding just 1.3 percent, with investment slowing “amidst continued uncertainty” about Brexit.

Source: Bloomburg