Economic nationalism seen as threat to modest recovery

A modest recovery under way in the global economy is at risk from economic nationalism and diverging central bank policies, the OECD said on Tuesday as it forecast only a slight pick-up in growth.

The Paris-based Organisation for Economic Co-operation and Development estimated global economic growth would run at 3.3 per cent this year before reaching 3.6 per cent in 2018, unchanged from its last estimates in November.

OECD chief economist Catherine Mann said higher interest rates in the US could unleash damaging volatility on financial markets for some borrowers while potentially pushing the dollar higher.

“The economic nationalism is a much bigger wildcard because we don’t know how the language translates into policy at this point,” Ms Mann told Reuters as the OECD updated its outlook for major economies.

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US president Donald Trump’s campaign promises last year to put “America first” in trade, and his calls for tariffs on imports from China and Mexico, caused consternation among the major trade partners of the US.

Import costs

Although Washington was not alone in using nationalistic rhetoric, Ms Mann said the OECD had estimated that a 10 per cent increase in US import costs would percolate through the economy and ultimately lift export costs by 15 per cent.

The OECD said that with only a modest recovery in view in most countries, financial markets were becoming disconnected from economic reality as consumer spending and business investment remained weak.

With the US Federal Reserve widely expected to steadily rise interest rates for some time, the OECD said exchange rate swings could be expected. That could put at risk emerging market borrowers who binged on cheap dollar loans in recent years, especially in countries with excessive levels of private sector debt, like China.

Updating its last forecasts for major economies, the OECD estimated the US economy would grow 2.4 per cent this year as domestic demand firms, up from 2.3 per cent in its last forecasts from November.

Monetary policy

With monetary policy relaxed and some fiscal policy easing in the euro zone, growth was seen this and next year at 1.6 per cent, with the 2017 forecast unchanged and the 2018 forecast trimmed from 1.7 per cent in November.

As rising inflation hits British consumers and businesses put investment on hold over Brexit, British growth was seen slowing from 1.6 per cent this year to 1.0 per cent in 2018. The OECD had forecast 2017 growth of 1.2 per cent in November and its 2018 forecast was unchanged.

In Japan, fiscal easing was seen underpinning growth of 1.2 per cent, though the rate was seen falling back to 0.8 per cent in 2018. In November, the OECD had forecast growth of 1.0 per cent this year and its estimate for 2018 was unchanged. – Reuters