OECD says worldwide recovery is set to stall this year

The global economy is slipping into a self-fulfilling “low-growth trap” where ultra-loose monetary policy risks doing more harm than good, the Organisation for Economic Cooperation and Development warned.

In a highly critical editorial in the OECD’s latest Economic Outlook, rich world governments bear the brunt of the blame for failing to revive demand and failing overhaul their economies in the wake of the financial crisis in 2008.

According to the Paris-based group, which advises its 34 member countries, too much of the burden of lifting growth has been left to central banks.

After pushing interest rates below zero and pumping money into their economies through asset purchases, they are starting to see diminishing returns and their actions could even generate financial-market volatility.”

Monetary policy has been the main tool, used alone for too long,” OECD chief economist Catherine Mann said in the semi-annual report released Wednesday.

“In trying to revive economic growth alone, with little help from fiscal or structural policies, the balance of benefits-to-risks is tipping.”

Mann also said that “negative feedback loops are at work.”

Lack of demand, global uncertainties and slow reform progress are deterring investment, while trade growth remains too weak, she said.

”Monetary policy cannot revive near and long-term growth by itself, and distortions are increasing,” the OECD said.

Ultra-low and negative rates have stressed bank profitability and created financial strains for pension funds and insurers, while becoming “less potent” in stimulating consumption, it said.

The worldwide recovery is set to stall this year, with output growing 3 percent.

That forecast is unchanged from the organisation’s February 18 estimate and it would match the pace seen in 2015. Expansion should accelerate to 3.3 percent next year, the OECD said.

“Fiscal policy must be deployed more extensively and can take advantage of the environment created by monetary policy,” Mann said in her editorial introducing the report.

“Governments today can lock in very low interest rates for very long maturities to effectively open up fiscal space.”Â

The OECD's message echoes the mantra of European Central Bank President Mario Draghi, who has long called for governments to do more to stimulate growth.

After the ECB’s April policy meeting, he said that “in order to reap the full benefits from our monetary policy measures, other policy areas must contribute much more decisively.”

Bloomberg