OECD predicts two more years of economic expansion, but oil and trade are major risks

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A worker monitors the loading of containers onto a ship in Qingdao Port, northeast China’s Shandong Province.

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The current growth outlook is promising, but specific risks could jeopardize long-awaited progress, according to a report released on Wednesday by the Organization for Economic Co-operation and Development (OECD).

Global gross domestic product (GDP) growth is approaching the long-term average of 4%, the “cruising speed” reached before the financial crisis, the The OECD Economic Outlook 2018 noted. Unemployment in the organization’s 35 member states, most of which are considered highly developed, is at its lowest since 1980.

But a brewed combination of rising oil prices, trade tensions and financial market vulnerabilities could combine in an environment of monetary tightening, heralding potential disaster.

Economic expansion is still fueled by low interest rates and fiscal stimulus, which means it is not fully organic and is more vulnerable to market and political changes, the secretary-general warned. OECD, Jose Angel Gurria.

“Economic expansion is expected to continue over the next two years and the short-term growth outlook is more favorable than it has been for many years,” he told reporters at the conference. OECD annual forum in Paris. “However, the current recovery is still supported by very accommodating monetary policy, and increasingly by fiscal easing. This suggests that strong, self-sustaining growth has yet to be achieved.”

An Iranian nationally flagged support vessel sails alongside the tanker “Devon” as it prepares to transport crude oil to export markets in Bandar Abbas, Iran on Friday March 23, 2018.

Ali Mohammadi / Bloomberg via Getty Images

Oil prices have risen dramatically over the past year, and if they continue on this trend – some experts predict a return to $ 100 a barrel – economies will experience severe inflationary pressures and weaker household growth, according to The report.

And as central banks move away from monetary easing and raise interest rates, especially in the United States, this normalization could expose economic vulnerabilities created by years of financial risk-taking and growing debt. . Public and private debt are at record highs, and for emerging markets with high leverage in foreign currencies, the economic pain is already manifesting itself.

More tax breaks like tax cuts and increased government spending – as is the case in the United States – exacerbate those risks, according to the report.

To address this, the OECD has underscored the need for structural reforms and policies to boost skills, increase labor productivity and invest in innovation.

Phil O’Reilly, chairman of the OECD’s Business and Industry Advisory Committee (BIAC), told CNBC that the only way to avoid a crisis caused by unmanageable debt is to continue growing through such reforms.

“The fiscal stimulus is only good for a little while,” O’Reilly said. “The idea of ​​high debt is obviously an economic destabilizer. The answer is solid economic growth that goes beyond stimulus-driven growth and is fundamentally based.”

Achieving this growth will be based on three main reform areas, he said: skills advancement, digital inclusion and investment procedures.

“For years, companies have called for education to meet the needs of employers,” O’Reilly said. “It’s not expensive. It’s hard to do politically, but keep it up.”

Workers at German steel manufacturer Salzgitter AG stand in front of a furnace at a factory in Salzgitter, Germany, March 1, 2018.

Fabien Bimmer | Reuters

Digital infrastructure and digital inclusion, O’Reilly added, will be key to providing people in rural and disadvantaged areas with access to better tools for education, financial literacy and business opportunities. And improved and simplified investment procedures, at both federal and local levels, will stimulate cross-border trade flows and strengthen job creation in the private sector.

But in the absence of dedicated reforms and their effective implementation, there will be problems ahead.

“If you have rising interest rates and you don’t have long-term business confidence, you’re going to see business investment decline over time and you’re going to see the end of the story. fiscal stimulus, “O’Reilly said.

In a context of rising oil prices, financial tensions in emerging markets, tightening monetary policy, trade tensions and political shocks like those underway in Italy that potentially threaten all of Europe, the risks that these Risks derailing global growth remain closer to us than many policymakers. would like to admit.


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