OECD warns governments of ‘low-growth trap’

Governments around the world should focus on investing in health and education to help break out of the low-growth trap and convince people that globalisation has tangible benefits.

Those are the conclusions of new analysis from the Organisation for Economic Co-operation and Development, in which it repeats its forecast that global growth will remain at about 3 per cent this year and next. It also warns that monetary policy is overburdened and creating risky financial distortions.

“The world economy remains in a low-growth trap with persistent growth disappointments weighing on growth expectations and feeding back into weak trade, investment, productivity and wages,” said the OECD. “Fiscal policy should take advantage of [low borrowing costs] to increase growth-enhancing spending.”

The OECD’s forecast for global growth is little changed from its June forecast. The outlook for emerging economies has improved but growth prospects in advanced economies have deteriorated, leaving expectations for global growth of about 3 per cent this year and next.

Stagnation

Global growth has languished at about 3 per cent since the financial crisis – significantly below the 4 per cent average annual growth rate of the previous decade. Slow growth has caused incomes to stagnate in many countries. This, combined with high inequality, has stoked a backlash against globalisation.

This may have contributed to the UK’s vote for Brexit and the growing support for populist movements in other countries. The OECD believes “trade policies are a key lever to boost growth” but the widespread revolt against globalisation has been accompanied by a rise in protectionist policies.

Declining trade damages growth prospects for all countries but it is particularly damaging for emerging economies. Participating in global chains of production helps them gain access to new technologies and knowledge.

OECD chief economist Catherine Mann said governments should focus on "spending that has both short-term and long-term benefits for growth but also enhances equality". Investment in health, education and childcare subsidies would boost economic growth and ensure the benefits of globalisation and trade are distributed across society.

Traditional policies that focus on investing in infrastructure could boost growth. But putting money into expanding health and education provision would have the added benefit of redistributing the benefits from trade and economic growth across the population. This would help ensure all sectors of society gained and would raise support for further growth-enhancing trade liberalisation.

Market distortions

In its latest report the OECD also raised concerns about distortions in financial markets. More than 35 per cent of OECD government debt is trading at negative yields. This might be expected for highly creditworthy countries, such as Switzerland, but is more concerning for countries such as Italy. Furthermore, despite the average quality of corporate bonds having declined in recent years, the risk premium charged by investors for holding those bonds has fallen.

These financial distortions make economies more vulnerable to sudden asset price corrections. They also suggest monetary policy has become “overburdened”, with a risk that continued loose monetary policy will “challenge financial institutions’ business models and sustainability”, said the OECD. “A more balanced policy mix would put the global economy on a higher growth path and reduce financial risks”.

Economic growth in recent years has been slower than in the decade before the financial crisis. However, it has been in line with the rate of growth seen over the longer term. In 2017, global growth is forecast to be 3.2 per cent, about the same rate as was seen on average between 1990 and 2007. – (Copyright The Financial Times Limited 2016)