Remarks by Angel Gurría
Paris, France, 28 November 2016
(As prepared for delivery)
Ladies and Gentlemen,
On the face of it, the numbers and stories from today’s Economic Outlook may look all too familiar. World growth is still stumbling along at around 3%, trade growth is slower still, and inflation remains below target in most OECD economies, despite central bank policy rates remaining near or even below zero. Most of the signs of the low-growth trap that we have been talking about for a long time now are still there.
In fact, however, there is reason to hope that the global economy may be at a point of inflection.
We have for some time been arguing for countries to make more active use of the fiscal levers to escape the low-growth trap. Encouragingly, this is what policymakers are now beginning to do, leading to fiscal expansion in a number of large economies. This is an important factor leading us to project an upturn in global growth over the next two years.
Fiscal stimulus projected in the United States and China, together with an easing of consolidation efforts in Europe, accounts for most of the difference between the 2.9% global GDP growth forecast for 2016 and the 3.6% projected in 2018. There is now some prospect of the world exiting from the low-growth trap.
In our view, however, the actions and proposals we have seen so far are not enough. A number of other countries have scope to make more active use of fiscal policy. Low interest rates have opened a window of opportunity by reducing governments’ debt service costs and increasing so-called “fiscal space”. It is a window that may not remain open for long, so the opportunity should be seized.
As the Economic Outlook explains, a “fiscal initiative” of ½ per cent of GDP could be financed for several years in most countries without increasing the debt-to-GDP ratio in the medium term. Doing this together with structural reforms and doing it collectively rather than only in a few individual countries would magnify the gains. The case for undertaking such an initiative does not apply to every country, and some are already doing enough, but in several countries – notably in Europe – current plans are too timid.
This is not a blank cheque. If Othello “loved not wisely but too well”, we worry that some governments may do much the same with fiscal action. The OECD is calling for spending to be focussed on areas that boost growth, like high-quality infrastructure investment, education and skills. It should also be targeted to make growth more inclusive.
Unfortunately, the experience of recent years in too many countries is that public investment has been slashed, while the share of spending on education has fallen. We must hope that lessons have been learned from this unhappy experience.
If wise and effective fiscal initiatives are what we think governments should be doing, there are also pitfalls that we believe need to be avoided.
After the financial crisis and its legacy of debt overhangs and sluggish growth, the temptation to use protectionist policies to boost demand for domestic production is high. But world trade growth is already exceptionally weak. In 2016, we expect world trade volumes to expand by less than global GDP for only the third time in the past 30 years. This ebbing of trade intensity weakens competitive pressures and is bad for productivity growth. If countries increasingly resort to protectionism, that trend risks continuing, as other countries retaliate and the overall trade climate worsens. Even if fleeting advantages may be perceived, such a path would not lead to greater prosperity for anyone.
It is undoubtedly true that policies to boost openness and reduce trade costs are not sufficient on their own to ensure income gains that are shared by all. There are difficult challenges in complementing such policies with measures to cushion the shock for those who lose out – this means strong social safety nets – and help them to transition to other good jobs – this means, among other things, policies to facilitate mobility and adequate support for training and education of displaced workers. But it is better by far to take up those challenges than to look for easy solutions in raising barriers to imports.
With 340 million jobs in major advanced and emerging economies depending on trade, we can’t afford to get this wrong.
Ladies and gentlemen, the message of this Economic Outlook is that if policy makers can avoid the pitfalls of protectionism and seize the opportunity for collective fiscal action offered by still very low interest rates, combined with high-priority structural reforms, then the global economy can at last escape from the low-growth trap. That would indeed be a vindication of the OECD’s motto: better policies for better lives.
I now hand the floor to my chief economist, Catherine Mann, who will share with you some of the details from the report.