Global growth hinges on fiscal stimulus: OECD

Global economic growth is expected to pick up modestly in 2018, increasing to around 3.6% from a projected 3.3% in 2017.

Read: Global economy expected to accelerate slightly in 2017

But the path will be bumpy, says the OECD in its Interim Economic Outlook report, with hurdles such as sub-par GDP growth, rising protectionism, diverging interest rate paths across the globe, and major disconnects between market valuations and real activity.

The OECD also points to the rapid growth of private sector credit–and the relatively high level of indebtedness overall–in a number of emerging markets. Meanwhile, in advanced economies, housing valuations are a concern.

Read: The kind of home $1M buys in 7 Canadian cities

On housing, the report suggests, “The resilience of housing markets can be improved by addressing tax biases in favour of debt-financed home ownership and unnecessary obstacles to housing supply.” (Think of measures like the foreign buyers tax in B.C.).

Regarding emerging markets, the OECD suggests these economies focus on “credible policy framework and maintain[ing] open and transparent capital markets.”

The global economy’s hopes mainly hinge on projected fiscal and structural initiatives in major economies including China, Canada and the U.S. This stimulus is needed to drive private demand and boost global activity, and reduce inequalities, says the OECD.

OECD Secretary-General Angel Gurría says in a statement: “Growth is still too weak and its benefits too narrowly focused to make a real difference to those who have been hit hard by the crisis […]. Now, more than ever, governments need to take actions that restore people’s confidence,” including continuing to coordinate with global counterparts.

Simultaneous effort by both developed and emerging economies is key, says OECD chief economist Catherine Mann, who warns, “The pick-up in growth from countries taking fiscal initiatives is broadly welcome, but we cannot ignore the danger [of] the recovery getting knocked off track by policy errors, or financial risks and vulnerabilities. Coherent and committed policy action is needed to simultaneously raise growth rates and improve inclusiveness.”

Growth predictions

• In the U.S., domestic demand is set to strengthen, helped by gains in household wealth and a gradual upturn in oil production. GDP growth is expected to pick up to 2.4% this year and 2.8% in 2018, supported by an anticipated fiscal expansion, despite higher long-term interest rates and a stronger dollar.
• A moderate pace of growth is expected to continue in the eurozone but it’s being held back by some countries that have stubbornly high unemployment and underemployment–particularly of youth–as well as by banking sector weakness. GDP is expected to expand at an annual rate of 1.6% in both 2017 and 2018.
• In Japan, fiscal easing and improvements to women’s labour force participation will help GDP growth pick up this year to 1.2% from 1.0% in 2016. Prospects will depend on the extent to which labour-market duality is reduced and wage growth quickens.
• On China, the report says growth “is expected to edge down further to 6.25% by 2018 as the economy manages a number of necessary transitions, including shifting towards consumption and services, adjustment in several heavy industries, working off excess housing supply and ensuring credit developments are sustainable.”
• Brazil and Russia, which are recovering from deep recessions, will be boosted by higher commodity prices and easing inflation.

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.