Remarks by Angel Gurría,
20 May 2016
(As prepared for delivery)
Thank you for the invitation to share with you our views on how to get the global economy on a new growth path.
Global growth prospects remain disappointingly weak
The recovery remains disappointingly weak with global GDP expected to grow at only around 3% this year – little changed from last year – and with only a modest improvement in 2017. The upturn in advanced economies remains sluggish. While labour markets are healing, unemployment remains at 10% in the Euro Area and scars from the crisis remain. Low wage growth – combined with rising inequality- means that many people are not experiencing rising incomes.
At the same time, growth in emerging market economies has slowed, leading in some cases to sharp recessions. There are real financial stability risks in these economies, particularly tied to corporate debt. We should not forget that these economies now make up half of the global economy and have a major impact on prospects for the G7.
More worrying, the prolonged period of weak demand, investment and trade globally are leading to worsening outlook for potential output. For the OECD, we are now looking at a growth rate of potential output of 1% of GDP this year, around ¾ of a percentage point below the average in the decade prior to the financial crisis.
This reflects poor productivity performance. This is the result low investment but especially lower total factor productivity growth. Productivity for Inclusive Growth is the theme of this year’s OECD Ministerial Meeting in early June. This will draw on the ground-breaking work by the OECD suggesting that the frontier firms continue to power ahead in productivity performance but that other firms are falling behind. The slowdown of business dynamism – entry and exit rates of firms – is a key concern.
Less potential to grow makes it harder for governments to improve overall well-being and deliver on their promises of creating more and better jobs and opportunities. These factors contribute to a more difficult political climate and create risks. For example, a negative outcome of the EU membership referendum in the UK would damage the global economy. By 2020, the effects of Brexit could shave off over 3 percentage points of UK GDP and around 1 percentage point in the EU, according to OECD estimates.
A more comprehensive and concerted policy response is urgently needed
The OECD issued a strong call in its February Outlook to the G-20 to take strong collective action to boost demand and undertake structural reforms. All three policy levers – monetary, fiscal and structural need to be employed together - this is so-to-speak the “three-leg stool” on which our policy approach should be based. Monetary policy cannot carry the burden alone.
The OECD’s call for action focussed particularly on the need for higher public investment, either in the context of fiscal expansion or through reprioritisation of spending. Countries taking action together – particularly if accompanied by structural reforms - would have the greatest impact. A collective temporary increase of half a percentage point of GDP in public investment across all OECD economies would boost GDP by around 0.8% in the following two years and reduce the debt-to-GDP ratio.
Since February, we have seen some action. However, we remain short of what is needed.
But the area where we are making the least progress is structural reform. This year’s OECD Going for Growth report shows worrying signs of a decline in the pace of structural reform across advanced and emerging economies. The slowdown is occurring at the very moment that we need an acceleration in reform efforts!
First, the global economy needs a fresh impetus to international trade: Our research shows that a halving of the trade to GDP growth ratio from 2 to 1 would result in productivity 4 percentage points lower after 20 years! Structural impediments to international trade and investment need to be removed. Our monitoring for the G20 shows that 1,441 new restrictive trade measures have been introduced since October 2008; only 354 of these had been removed by mid-October 2015. We not only need a genuine standstill, but an outright roll-back of trade and investment protectionist measures. Fully ratifying and implementing the Bali Trade Facilitation Agreement as well as reducing trade costs and regulatory barriers for services - which compared to goods are high and have declined only marginally over the past 20 years – are two additional critical areas for action.
Second, firms need to continue investing vigorously in knowledge-based capital – R&D, software, organisational know-how and data, which have become a significant resource that can drive value creation. OECD’s work on the future of productivity shows that gains in GDP per capita will indeed become more dependent on accumulation of skills and, especially, on gains in multifactor productivity driven by innovation and knowledge based capital – which will be tomorrow’s new sources of growth.
Firms are gearing up for this transformation: in several OECD economies investment in intangibles now represents more than 50% of business investment. Our concern however is that, on average across OECD countries, the growth rate of investment in knowledge-based capital has fallen from an annual pace of close to 7 per cent during the second half of the 1990s to less than 5 per cent during the period 2000-07, which preceded the crisis. It has fallen further afterwards, thus contributing to the slowdown in MFP gains. Innovation efforts are also very concentrated - with 250 firms, mostly multinationals, accounting for more than half of all business R&D. In other words, traditional incentives (such as R&D tax credits) put in place in most countries to boost private spending on innovation are not fully effective and need to be reassessed and redesigned.
Third, we need to make sure that technological revolutions in the making - 3D printing, robotics, artificial intelligence or big data - which are shaping the so-called New Industrial Revolution will benefit everyone. They are indeed disruptive! Some countries, sectors, and socio-demographic groups are at risk of being left behind. For instance, digitalisation, together with globalisation and population ageing, is significantly changing labour markets. There is polarisation between non-routine jobs – high-skilled or low-skilled – and routine jobs, many of which are middle-skilled and are the most easily automated. The role of traditional labour market institutions and policies, as well as of existing social protection systems is being challenged. They must be adjusted and reformed. Developing, upgrading and maintaining the skills required for the digital world and for keeping up with technological change is also essential. These inclusive policies should be deployed together with those that promote innovation and growth.
The opportunities and challenges of these changes are great. Strong policy action is needed for the future, but that needs to start today. The OECD stands ready to support this progress.