While broadly more optimistic, the OECD warns of trade tensions and Brexit
Paris — Trade tensions are threatening the best global economic growth outlook in seven years, the Organisation for Economic Co-operation and Development (OECD) said on Tuesday.
The organisation also said that four US rate rises were likely this year as tax cuts stoked the world’s biggest economy, while Brexit would drag on Britain.
While broadly more optimistic than only a few months ago, the OECD warned a trade war could threaten the outlook, and forecast that UK growth would lag all Group of 20 (G-20) countries due to Brexit uncertainties.
Updating its outlook for the G-20, the OECD, which groups 34 of the world’s leading economies, raised its global growth forecast for 2018 and 2019 to 3.9% — the highest since 2011 — from a previous estimate of 3.6% for both years. The higher forecast was in part due to the expectation that US tax cuts would boost economic growth there, it said.
"We think the stronger economy is here to stay for the next couple of years," acting OECD chief economist Álvaro Pereira told Reuters. "We are getting back to more normal circumstances than we’ve seen in the past 10 years."
Rebounding global business investment would keep global trade growth at about 5% this year, the OECD forecast. However, it said the global economy was vulnerable to an eruption of trade tensions after the Trump administration imposed import tariffs on steel and aluminium, a move that is expected to prompt retaliation from Europe and other regions.
"This could obviously threaten the recovery. Certainly, we believe this is a significant risk, so we hope it doesn’t materialise because it would be fairly damaging," Pereira said.
The OECD forecast the US economy would grow 2.9% this year and 2.8% in 2019, with tax cuts adding 0.5 to 0.75 percentage points to the outlook in both years. Against this backdrop, the Federal Reserve would probably have to raise interest rates four times this year as inflation picked up, Pereira said. Previously the OECD had estimated three hikes would suffice this year.
With tax cuts boosting the economy this and next year, the OECD forecast the upper boundary of the target federal funds rate could reach 3.25% by the end of 2019 from 1.5% currently.
The OECD forecast the US economy would grow 2.9% this year and 2.8% in 2019
Britain was seen missing out on the global upturn, lagging behind all other G-20 countries with growth of only 1.3% this year. That was higher from a November forecast of 1.2% due to the broader global improvement.
With Britain due to leave the EU next year, its economic growth was seen easing to 1.1% in 2019, unchanged from the OECD’s November estimate. The OECD said high inflation would eat into UK household income while business investment would slow in the face of uncertainty over Britain’s future relationship with the EU.
In contrast, stronger growth in France and Germany boosted the outlook for the broader eurozone to 2.3% for this year and 2.1% in 2019. Previously, the OECD had forecast growth of 2.1% and 1.9% respectively.