Chief economist of the Organisation for Economic Co-operation and Development (OECD), Laurence Boone. Picture: AFP/ERIC PIERMONT
Chief economist of the Organisation for Economic Co-operation and Development (OECD), Laurence Boone. Picture: AFP/ERIC PIERMONT

Paris — Trade tensions and higher interest rates are slowing the global economy, though for now there are no signs of a sharp downturn, the Organisation for Economic Co-operation and Development (OECD) said on Wednesday, lowering its outlook for next year.

The OECD forecasts that global growth will slow from 3.7% this year to 3.5% in 2019 and 2020. It had previously projected 3.7% for 2019.

The global growth slowdown will be the worst in non-OECD countries, with many emerging-market economies likely to see capital outflows as the US Federal Reserve gradually raises interest rates. The OECD cut its outlook for countries at risk, such as Brazil, Russia, Turkey and SA.

Rising interest rates could also spur financial markets to reconsider and thus reprice the risks to which investors are exposed, triggering a return to volatility, the OECD said.

“We’re returning to the long-term trend. We’re not expecting a hard landing, however, there are a lot of risks. A soft landing is always difficult,” OECD chief economist Laurence Boone told Reuters in an interview.

“This time it is more challenging than usual because of the trade tensions and because of capital flows from emerging markets to countries normalising monetary policy.” 

A full-blown trade war and the resulting economic uncertainty could knock as much as 0.8% off global GDP by 2021, the OECD calculated. Though at the source of the current tensions, the US economy is expected to fare better than most other major economies, albeit because of costly fiscal stimulus.

Softer growth in US and China

The OECD left its forecasts for the US in 2018 and 2019 unchanged, projecting growth in the world’s biggest economy will slow from nearly 3% this year to slightly more than 2% in 2020 as the impact of tax cuts wanes and higher tariffs are added to business costs.

Trimming its outlook for China, the OECD forecasts the country’s growth will slow from 6.6% to a 30-year low of 6% in 2020 as authorities try to engineer a soft landing in the face of higher US tariffs.

The outlook for the eurozone was also slightly darker than in September, with growth seen slipping from nearly 2% this year to 1.6% in 2020, despite loose monetary policy over the period.

The Italian economy is seen slowing more than previously expected despite the expansionary budget of the populist-led government that has created friction with Brussels. The OECD forecasts Italian growth at only 1% this year, lingering at 0.9% in 2019 and 2020, as stalled job creation and higher inflation erodes the boost from the budget stimulus.

In Britain, the OECD forecasts growth will pick up from 1.3% this year to 1.4% in 2019, supported by a looser budget and up from an estimate of 1.2% in September.

However, after the fiscal boost peaked in 2019, growth will fall back to 1.1%, the OECD said, urging the government to be prepared to respond if the economy weakened significantly due to Brexit.