Global growth weakening as - OECD · 2016 2017 Q4 2018 % y-o-y United States Euro area 2.5 3.0 3.5 4.0 4.5 2016 2017 2018Q4 % q-o-q a.r. y-o-y Global growth is slowing with further

6 March 2019

Laurence BooneOECD Chief Economist

OECD INTERIM

ECONOMIC OUTLOOK

Global growth weakening as

some risks materialise

http://www.oecd.org/eco/outlook/economic-outlook/

ECOSCOPE blog: oecdecoscope.wordpress.com

Key messages

2

Growth is weakening particularly in Europe

Vulnerabilities in China, Europe and financial markets could derail the global economy

Governments should cooperate to reduce risks

1.0

1.5

2.0

2.5

3.0

3.5

2016 2017 Q42018

% y-o-y United States Euro area

2.5

3.0

3.5

4.0

4.5

2016 2017 2018Q4

%q-o-q a.r. y-o-y

Global growth is slowing with further signs of

decoupling

3

GDP growth is more dispersed World GDP growth has started to

slow

Note: LHS: Global growth in PPP terms. GDP figures for the fourth quarter of 2018 are based on available national accounts data plus

estimates for Argentina, Australia, Russia, and Turkey.

Source: OECD Economic Outlook database.

2018 2019 2020 2018 2019 2020

World 3.6 3.3 3.4 G20 3.8 3.5 3.7

Australia 2.9 2.7 2.5 Argentina -2.5 -1.5 2.3

Canada 1.8 1.5 2.0 Brazil 1.1 1.9 2.4

Euro area 1.8 1.0 1.2 China 6.6 6.2 6.0

Germany 1.4 0.7 1.1 India1 7.0 7.2 7.3

France 1.5 1.3 1.3 Indonesia 5.2 5.2 5.1

Italy 0.8 -0.2 0.5 Mexico 2.1 2.0 2.3

Japan 0.7 0.8 0.7 Russia 2.3 1.4 1.5

Korea 2.7 2.6 2.6 Saudi Arabia 2.0 2.1 2.0

United Kingdom 1.4 0.8 0.9 South Africa 0.8 1.7 2.0

United States 2.9 2.6 2.2 Turkey 2.9 -1.8 3.2

Real GDP growth revised down

4

OECD Interim Economic Outlook ProjectionsYear-on-year, %. Arrows indicate the direction of revisions since November 2018.

Note: Difference in percentage points based on rounded figures. Dark red for downward revisions of 0.6 percentage points and more. Dark

green and dark orange for, respectively, upward and downward revisions of 0.3 percentage points and more but less than 0.6 percentage

points. Light green and light orange for, respectively, upward and downward revisions of less than 0.3 percentage points. The European

Union is a full member of the G20, but the G20 aggregate only includes countries that are also members in their own right.

1. Fiscal years starting in April.

5

Euro area export volume growth

Trade growth continues to decelerate

Note: RHS: East Asia is a PPP-weighted aggregate of Japan, Korea, Malaysia, the Philippines, Thailand, Taiwan and Vietnam.

Source: Markit; Eurostat; and OECD calculations.

New export ordersManufacturing

-1

0

1

2

3

4

5

6

7

Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Dec-18

Intra-EA Extra-EA

% y-o-y 3-month moving average

85

90

95

100

105

110

115

Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Dec-18

China Euro area East Asia

Index 2015-19 average = 100

Feb-19

6Note: LHS panel: Data normalised over the 2014-2018 period; PPP-weighted aggregates of the OECD countries.

Source: OECD Main Economic Indicators database; Markit; and OECD calculations.

Trade tensions and policy uncertainty take

a toll on confidence and hiring intentions

Confidence in OECD countries

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

2014 2015 2016 2017 2018 2019

Normalised

Business confidence Consumer confidence

92

94

96

98

100

102

104

106

108

2014 2015 2016 2017 2018 2019

United States Euro area United Kingdom

Index 100 = 2014-2019 average

2014-2019 average

Firms’ hiring intentionsPMI for employment

VULNERABILITIES IN CHINA, EUROPE AND FINANCIAL

MARKETS COULD DERAIL THE GLOBAL ECONOMY

7

-0.6

-0.5

-0.4

-0.3

-0.2

-0.1

0.0

United States Euro area Germany Japan Commodityexporters

East Asia World

% Trade Uncertainty

A slowdown in China

would weigh on growth across the world

8

Note: Simulated impact of a decline of 2 percentage points per year in domestic demand growth in China for two years. The uncertainty shock

is a 50 basis point increase in investment risk premia in all economies. Policy interest rates are endogenous in all areas. Commodity exporters

include Argentina, Australia, Brazil, Chile, Indonesia, Russia, South Africa and the other oil producers. East Asia includes Chinese Taipei,

Hong Kong (China), Korea, Singapore, Vietnam and other East Asian countries. Regions are weighted using purchasing power parities.

Source: OECD calculations.

GDP growth impact of a negative demand shock of 2% pts in China%, difference from baseline in the first year

9

10-year government bond yield

Note: RHS: Credit growth of loans adjusted for sales and securitisation, non-financial corporations.

Source: Thomson Reuters; and OECD calculations.

Slower credit growth may weaken the euro

area further

Credit growth

-12.5

-10.0

-7.5

-5.0

-2.5

0.0

2.5

5.0

7.5

2010 2012 2014 2016 2018

Italy Germany France Spain% y-o-y

2019

Sovereign bond yields

Bank credit to non-financial corporations

-1

0

1

2

3

4

5

6

7

8

2010 2012 2014 2016 2018

Germany France Italy Spain%

2019

10Note: LHS: The green line is a GDP-weighted average of France, Germany and the United States.

Source: OECD Economic Outlook database; and OECD calculations.

The UK economy has been weakening

since the Brexit referendum

Real GDP loss since the 2016 referendum Investment has declined

99

100

101

102

103

104

105

106

107

108

109

2016 2017 2018

United Kingdom OECD

Index 2016Q2 = 100

99

100

101

102

103

104

105

106

2016 2017 2018

Germany, France and the United StatesUnited Kingdom: ActualUnited Kingdom: Pre-referendum OECD projections

1.7%

0.7%

Index 2016Q2 = 100

11Note: Black triangles represent the share of total goods export in % of GDP. Data as of 2016 for the Netherlands.

Source: OECD International Merchandise Trade Statistics database; OECD Economic Outlook database; and OECD calculations.

A combination of these risks could further

weaken euro area growth

Bilateral share of goods exports2017

0

20

40

60

80

100

0

10

20

30

40

50

United Kingdom Italy Germany China Total exports in % of GDP (rhs)

% of total exports % of GDP

12

Pressure on EMEs has eased but

vulnerabilities persist

EME sovereign bond yield spreads have

declined

Record level of corporate bond repayments

aheadEmerging market economies

Note: LHS panel: Global EMEs stands for JP Morgan Emerging Bond Index (EMBI), which measures the yield spread between EMEs’

government bonds denominated in US dollars and US Treasuries.

Source: Thomson Reuters; Çelik, S., G. Demirtaş and M. Isaksson (2019), “Corporate Bond Markets in a Time of Unconventional Monetary

Policy”, Paris; and OECD Capital Market Series.

0

10

20

30

40

50

0

200

400

600

800

1000

1200

1400

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Due in year 3 Due in year 2Due in year 1 Due within next 3 years (rhs)

USD billion % of outstanding

2

3

4

5

6

7

8

9

Jan-17 Jul-17 Jan-18 Jul-18 Jan-19

Turkey Argentina Global EMEs% pts

2

3

4

5

6

7

8

9

2

3

4

5

6

7

8

9

Jan-17 Jul-17 Jan-18 Jul-18 Jan-19

Turkey Argentina Global EMEs% pts % pts

Mar-19

GOVERNMENTS SHOULD COOPERATE TO REDUCE RISKS

13

14Source: Thomson Reuters; and OECD calculations.

Interest rates are set to stay low

for longer

Expected overnight interest rates

for end-2019Market expectations

10-year government bond yields

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2017 2018 2019

Euro area United Kingdom Japan United States

%, 15-day m.a.

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

2017 2018 2019

United States GermanyUnited Kingdom Euro area%

15

Potential GDP per capita growth and public debt

Note: Public debt is based on Maastricht criteria.

Source: OECD Economic Outlook database; and OECD calculations.

Public debt levels vary between countries but

trend growth is low in most euro area countries

Germany

France

Italy

Austria

Belgium

Finland

Greece

Ireland

Netherlands

Portugal

Spain

Latvia

Slovak Rep.

Slovenia

20

40

60

80

100

120

140

160

180

0 1 2 3 4 5

Public Debt in 2017, % of GDP

Potential GDP per capita growth in 2017-2019, % average annual change

More

fiscal

space

More scope for

structural reforms

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

2019 2020 2021 long-run

%

16

Impact of structural reforms and a coordinated 3-year fiscal stimulus

in countries with fiscal space in the euro area

Note: The level of technical progress is gradually raised by 1% by the fifth year in all countries, and countries with fiscal space also increase

government investment by 0.5% of GDP for three years. Euro area monetary policy is assumed to be set in a way that takes into account the

eventual long-run improvement in output. Countries with fiscal space here include Germany, the Netherlands, Austria, Finland, Ireland, Slovak

Republic, Slovenia, Estonia, Latvia, and Lithuania.

Source: OECD calculations.

Euro area: coordinate fiscal support and structural

reforms to avoid a downturn and spur wages

GDPReal, difference from baseline, per cent

Wages per employeeReal, difference from baseline, per cent

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

2019 2020 2021 long-run

% Fiscal stimulus in countries with fiscal space

Structural reforms only

Key messages

17

Growth is weakening particularly in Europe

• Uncertainty is weighing on confidence, trade, investment and employment prospects

• EU trade has slowed sharply, contributing to weaker-than-expected growth in Europe

Vulnerabilities in China, Europe and financial markets could derail the global economy

• A sharper slowdown in China would weigh on global growth and could weaken growth in Europe further

• Political uncertainty in Europe is high and could weaken credit growth

• Challenges persist in financial markets and some EMEs

Governments should cooperate to reduce risks

• Intensify multilateral dialogue globally and in Europe to reduce policy uncertainty

• Central banks should remain supportive but cannot and should not act alone

• Euro area governments should coordinate a fiscal and structural push