G20 Finance Ministers and Central Bank Governors Meeting
Session 1: Global Economic Outlook
Remarks by Angel Gurría,
Chengdu, 23 July 2016
(As prepared for delivery)
Ministers, Central Bank Governors,
The world economy is stuck in a low-growth trap. We project global GDP growth to remain at only around 3% this year, and barely better in 2017.
This low-growth trap involves a cycle where diminished expectations become self-fulfilling. Facing low demand, firms are naturally cautious about expanding investment. Weak investment holds back productivity. This leads to subdued wage growth. The resulting slow growth of consumption feeds back onto firms’ expectations about demand growth, which again result in weak investment. The vicious cycle repeats itself.
Weak trade is a major concern. Trade growth has been sluggish since the crisis. But, the most recent data suggest it is now falling. This is almost unprecedented outside times of crisis. No satisfactory global recovery can be sustained without deepening economic integration.
The recent UK vote to leave the EU further complicates the picture. It is vital for all those involved to work together to find constructive solutions and the OECD stands ready to support you.
While it is too early to make a full assessment, developments so far have been broadly in line with the OECD’s pre-referendum scenarios. While the effects on the world economy will likely be more modest, effects on the UK and EU economies will likely be large enough for growth to slow in 2017 rather than pick up as we forecast in June.
The UK vote – alongside developments across many other countries – is a wake-up call to the political risks from the low-growth growth trap and rising inequality. We must stem the rising tide of anti-globalisation sentiment and the “politics of anger”.
To restore confidence in the economy and our institutions, the G-20 needs a new and credible narrative about growth that tackles these concerns. Discussions at the OECD’s recent Ministerial Council Meeting around the theme of Enhancing Productivity for Inclusive Growth provided a starting place for the required forward-looking structural reform agenda.
Last February, in Shanghai, G20 Finance Ministers made an important commitment to “[use] all policy tools – monetary, fiscal and structural – individually and collectively to foster confidence and strengthen growth.”
Some countries have taken measures that follow up on this commitment, including the important stimulus measures here in China, increases in public investment in Canada and the UK, and major new reforms in Argentina.
However, as our low growth forecasts indicate, policy action to date falls short of what is needed.
Overreliance on monetary policy has taken bond yields deep into unchartered territory. Today, $11.7 trillion of government debt is trading at negative yields, with German and Japanese rates negative at up to 10 years. This creates growing financial risks, distorts financial investment and encourages leveraged risk-taking.
This calls for stregthening demand with greater stimulus from fiscal policy, which remains broadly neutral in the major advanced economies. However, very low interest rates over long horizons are expanding the “fiscal space” countries have to support demand, without threatening fiscal sustainability.
The priority should be a collective effort to profit from 8 years of fiscal consolidation and from very low or negative interest rates to boost high-quality public investment in projects with high multiplier effects, combined with reforms that will help to “crowd in” private investment. This would in time help to lower debt-to-GDP ratios.
A second area where G20 collective effort would bear fruit is a roll-back of the trade barriers that have been put in place in the last few years. At the last count, we identified more than 1400 protectionist actions against only more than 300 actions to liberalise trade further. As noted by the Trade Ministers communique, rising protectionism – against the G20 stated commitments -- undermines growth and productivity.
Trade liberalisation is part and parcel of a broader structural reforms agenda that the G20 should implement to boost productivity and the potential of our economies to grow. Our countries need to invest in innovation, digital infrastructure, skills – I will elaborate on those aspects in the next session devoted to the Framework.
In short, the G20 needs to make a strong commitment to use all tools to boost confidence and inclusive growth.