Meeting of the OECD Global Parliamentary Network in Tokyo
Remarks by Angel Gurría,
12 April 2016
(As prepared for delivery)
Ladies and Gentlemen:
I wish I could get this meeting under way by assuring you that all is well with the world economy and that policy settings are delivering good results, but unfortunately this is not the case. Eight years after the global financial crisis, stronger global growth remains elusive and downside risks remain high. We revised our forecasts down again in the OECD Interim Economic Outlook released in February. Global GDP growth is now projected to be around 3% in 2016, little changed from 2015, and only a modest improvement is foreseen for 2017. Such growth rates are well below long-run averages.
An upturn is underway in the advanced economies, but it remains modest, held back by inadequate wage and employment growth and subdued investment. The ongoing growth moderation in China has contributed to lower commodity prices and weaker global trade growth. This is creating more challenges for commodity exporters and economies with strong trade links to China. This has been obvious in countries like Brazil and Russia. For now, in emerging Asia its impact has been compensated by strong domestic demand growth, but in the coming years weaker export demand is expected to weigh on growth prospects of these economies given their strong integration into regional manufacturing supply chains.
Low commodity prices have been more of a mixed blessing than expected. They support consumption in commodity-importing economies, such as Japan and India, but are restraining investment and adding to financial pressures on commodity-producing firms and commodity-exporting countries. Supportive macroeconomic policies and low commodity prices should underpin a pickup in growth in the advanced economies in the next two years, provided that wage increases and business investment growth strengthen and tensions in financial markets subside.
Emerging market economies are likely to experience mixed fortunes, reflecting differences in the space available for policy support, the impact of lower commodity prices, progress in enacting structural reforms and the extent of financial vulnerabilities.
Growth prospects in emerging Asia remain relatively solid. For example, growth in the ASEAN countries averaged 4.6% in 2015 and is projected to increase to 4.9% in 2016, though future risks remain, associated with the slowdown in China’s economy, financial volatility and slowing rates of productivity growth.
In China, growth is projected to continue moderating gradually, despite the additional monetary and fiscal policy support. Managing the rebalancing process remains challenging, given the heavy debt burden and elevated financial market volatility. A sharper slowdown in China, in a context of financial turbulence, is one of the big downside risks for the world economy.
Growth in India is projected to remain robust, although floods have had a negative impact in the short term and further progress is needed in implementing structural reforms to ensure that positive developments are sustained.
Among the major advanced economies, growth is most solid in the United States, where the domestic private-sector-led has been resilient in spite of headwinds from the strength of the dollar and declining energy sector investment. However, steady and sustained employment gains have not yet fed through to solid wage growth. As a result, the United States has continued to see a sub-par cyclical recovery.
In Japan we see a somewhat similar situation. We project only modest growth in 2016-17, especially if wage growth does not strengthen. Weak activity in Japan’s key trading partners in Asia is hampering trade growth, and the planned consumption tax increase next April will represent a headwind for the economy in 2017.
In the euro area, the ECB’s adoption of quantitative easing last year appears to have helped foster improved growth. Even so, soft investment, high unemployment and, in some countries, sizeable non-performing loans, continue to hinder growth. Meanwhile, the United Kingdom’s economy is losing momentum, which is probably due in part to the uncertainty regarding its future in the EU. And if the UK votes to leave the Union, the uncertainty over the negotiations will also be a negative factor for the rest of Europe.
A decisive and collective policy response is needed
A decisive and collective policy response is needed to get back to healthy growth. Experience since the global crisis has shown that reliance on monetary policy alone will not necessarily deliver satisfactory growth, or even prevent inflation from falling below target. Greater use of fiscal and structural levers is required to complement continued accommodative monetary policy. Strategies that explicitly combine all available tools enable full advantage to be taken of their complementarities.
Many governments can now borrow for long periods at very low interest rates, effectively increasing fiscal space. Remarkably, yields on Japan’s government bonds are negative out to 10 years, despite Japan having the highest debt-to-GDP ratio in the OECD. And most governments have scope to reallocate spending towards growth-friendly items. Collective action across economies to raise public investment in carefully selected projects with a high growth impact would boost demand without compromising fiscal sustainability. Such measures would be enhanced by collective efforts to reverse the slowdown in the pace of structural reforms observed recently in both advanced economies and EMEs.
This would create an environment more conducive to innovation and an efficient allocation of resources, helping to reverse the widespread slowdown in productivity observed in recent years. Packages of structural reforms to promote long-term improvements in employment and productivity growth should also focus on possible short-term demand benefits, given the weak global economy.
Boosting trade is crucial for a stronger recovery
Trade – a key cylinder of the global economic engine – remains strikingly weak, growing by around 2½% in 2015, held back by subdued investment, low commodity prices and the rebalancing underway in China. Early signals this year reveal few signs of a substantive upturn. This makes it essential that all countries maintain momentum towards greater openness and lift the protectionist measures put in place in recent years.
The Trans-Pacific Partnership agreement concluded last October is a welcome step in this regard. Similarly, regional integration efforts in Asia have intensified at varying levels over the years to implement the regional integration initiatives of ASEAN, ASEAN+3 and ASEAN+6. Despite important and positive achievements, a lot remains to be done for achieving more trade and economic integration. In particular, ASEAN countries need to take active steps towards implementing a single market, co-ordinating between regional initiatives and national agendas, and regional and sub-regional initiatives, reducing disparities in the region by supporting the further development of the less developed member countries, and moving towards stronger ties with the ASEAN+3 and ASEAN+6 frameworks.
Global growth continues to disappoint. Rethinking the policy mix is therefore essential. Ambitious and collective actions across a range of policies are needed to boost growth durably.
Whether using fiscal tools to support short-term aggregate demand, or undertaking reforms to strengthen trade, innovation and competition, the gains from acting together will be greater than those from uncoordinated initiatives by individual countries.