G20 Finance Ministers’ session on the Global Economy
Remarks by Angel Gurría,
Hangzhou, China, Sunday 4 September 2016
(As prepared for delivery)
Ministers, colleagues, ladies and gentlemen,
The global economy remains stuck in a low-growth trap
Over the summer, the news has been mixed with some better news from Brazil and Russia on the back of higher commodity prices and the positive impact of stimulus here in China. On the other hand, growth has disappointed in some large advanced economies and because of Brexit, growth in the UK will slow significantly - despite the welcome actions taken by the Bank of England.
OECD’s Interim Economic Outlook is largely unchanged with global GDP growth of around 3% this year – the same as last year – and only a moderate improvement, if at all, for 2017.
In short, we remain stuck in the low-growth trap of slow investment, trade, wage and productivity growth – as I mentioned recently in Chengdu.
Today’s low interest rates are not sustainable
It is striking that this mediocre performance occurs with interest rates at their lowest ever. Even with long horizons, yields are often extraordinarily low, leaving 14 trillion dollars of government trading at negative yields, almost 40% of the total outstanding in the OECD.
This is not sustainable!
Interest rates could rise significantly, triggering turbulence in financial markets across all asset classes: bonds, equities, as well as real estate. And by remaining this low, they will be harmful to the fabric of many of our financial and social institutions, for instance those designed to support long-term savings – including for retirement.
Fiscal and structural policies to escape the trap
How do we get out of the low growth - low interest rate trap?
The G20 has agreed to use all available policy tools to boost growth, including fiscal and structural, which would create the conditions for more normal interest rates.
On fiscal policy, many countries are heeding the call to boost public investment. As part of the Hangzhou Action Plan, the United States raised federal budget spending authority by USD 111 billion for 2016 and 2017 to support near-term demand. China will make a central government investment of 500 billion yuan in 2016 to support priority areas. Japan has formulated an economic stimulus package with a fiscal component representing 2.6% of its GDP.
However, others – notably in the Euro area – need to do more. With low interest rates, fiscal space has increased and a collective increase in public investment spending would actually improve, rather than weaken, debt sustainability by lowering the debt-to-GDP ratio.
The suite of structural reforms in promoting product market competition, labour mobility and financial market robustness are critical to create an environment conducive to innovation – a priority of the Presidency – which would in turn help kick start productivity gains and bolster long-term growth.
In this regard, the IMF-OECD assessment is mixed: measures implemented so far will add around 1% to G-20 GDP by 2018, still far from the 2% target agreed in Brisbane. Certainly, new measures are set out in your updated growth strategies that will help achieve a better outcome by then. But let’s not forget that half of the Brisbane commitments remain to be fully implemented while the actual pace of structural reform in G20 countries is slowing. More than ever, “implementation, implementation AND implementation” will be key to success - and the OECD looks forward to reporting back in 2017 on the Enhanced Structural Reform Agenda developed this year.
Structural policies must be complemented by additional measures to promote inclusive growth. They are essential to break the toxic feedback loop between rising inequalities and slowing productivity. The Hangzhou Action Plan outlines several initiatives. Canada is increasing the guaranteed income supplement for senior citizens, India is introducing a health insurance scheme to protect one-third of the country’s populations and Turkey has increased the minimum wage by 30%.
Getting ahead of the curve
Policy action is moving in the right direction, but we can only escape the self-reinforcing low-growth trap by meeting the aims of the Hangzhou Action Plan to forge a path towards strong, sustainable, balanced and inclusive growth.