October 2016 G20 Finance Ministers and Central Bank Governors working dinner
Remarks by Angel Gurría,
Washington DC, 6 October 2016
(As prepared for delivery)
Ministers and Governors,
In the OECD’s Interim Economic Outlook two weeks ago, we forecast global GDP growth to remain flat at below 3% this year and increase only modestly to 3.2% in 2017. This is slightly lower than our June Economic Outlook forecasts, due to weaker conditions in advanced economies, including the effects of Brexit, offset by an improvement in major emerging market commodity producers.
The string of recent feeble growth rates is well-below the historical “cruising speed” average of 4% global growth.
In short, we remain stuck in the “low-growth” trap that I mentioned in our previous meetings. We are trapped in a vicious circle of weak global demand and adverse supply-side and structural developments – in such areas as investment, trade and productivity – that are undermining the ability of our economies to grow over the long term.
For the OECD as a whole, potential GDP-per-capita growth is estimated at 1% in 2016, which is half the average in the two decades preceding the crisis. Potential per capita output growth in China has also fallen by 1¾ percentage points since 2011 and by 1 percentage point in the BRIICS economies.
Let me focus today on one critical driver of this low-growth trap: slowing trade.
World trade growth has collapsed. We expect trade to grow by below 2 per cent in 2016, less than world GDP. This has only happened once in the past 30 years.
Some of this has to do with weak investment and structural changes going on in the world economy – such as the rebalancing of China.
But worryingly, recent OECD research suggests that the development of global value chains – a key driver of productivity is now going into reverse. After decades of expansion, our real time global value chain indicator was negative from 2011 to 2015. This could signal permanently lower trade. In other words, we may be de-globalising! This, in due course, would have a negative impact on productivity growth.
The imposition of new trade measures, despite the stand-still commitment, and the lack of progress on new growth of trade agreements – despite a few bright spots – is making this worse. If the rate of trade were to get back to a more normal level, then productivity growth in advanced economies would be boosted by more than one-third by 2025.
Thus, we need a much more robust policy response.
Monetary policy may have reached its limits, but it has created some fiscal space for greater public spending through very low interest rates. Around USD 14 trillion of government bonds, more than 35% of OECD government debt, is currently trading at negative yields.
Let’s make the most of it, through vigorous, collective action! Some G20 countries (Canada, Japan, Korea, the UK and the US) have acted but more needs to be done. The euro area, in particular, could do more to support increased investment spending by easing the application of the Stability and Growth Pact.
All countries can also change their spending and tax policies to be more growth-friendly and to reduce inequalities - including quality infrastructure projects, well-targeted active labour market policies and support for basic research, to boost demand today and long-term growth tomorrow.
And of course, structural reform implementation needs to be intensified to boost growth and resilience. This year, G20 countries were only half-way to the target of 2% of GDP additional growth by 2018. Moreover, despite concerns about weak trade growth, the share of trade related commitments in the Growth Strategies fell to 6% from 14% two years ago.
But given the anti-globalisation backlash, trying to re-ignite global trade and investment simply through further market liberalisation will not be enough.
We need to make a better case for open and integrated markets and demonstrate that openness in trade, investment and labour flows enhances the well-being of our citizens, offers opportunities for firms of all sizes, and supports inclusive and sustainable growth. Trade policy must be interwoven into the fabric of domestic policies. Reforms to promote trade and deepen global integration need to be enhanced by structural, social and skills policies - social protection for workers in transition, investments in human capital and infrastructure and product market reforms to promote competition and firm entry – to ensure the benefits of trade are widely shared.
With such an integrated policy package, we can put the global economy on a stronger, more sustainable and inclusive growth path.