Opening Remarks by Angel Gurría,
9 June 2016
(As prepared for delivery)
Dear Ana, dear Ignazio, ladies and gentlemen,
It is my great pleasure to launch this second edition of the OECD Business and Finance Outlook, along with the first edition of an accompanying Business and Finance Scoreboard, which has a wealth of statistical information relating to the Outlook.
We will open this event with two honourable keynote speakers, my dear friend Ana Botin, chairwoman of Santander, who will give us a private sector perspective on the issues, and Ignazio Visco, Governor of the Banca d’Italia and formerly the OECD’s Chief Economist, who will convey his views as a supervisor and policy maker. Then the OECD’s Director of Financial and Enterprise Affairs and my Special Advisor for Financial Markets, Adrian Blundell-Wignall, who fathered this publication, will talk us through its main features, after which the distinguished panellists will focus on some of the nitty-gritty details of what is at stake today.
I want to welcome US Assistant Secretary of Labor Phyllis Borzi and Campari Chairman Luca Garavoglia, who will join this high-level panel. And I’m happy that Manuel Aguilera, former Chair of the OECD Insurance and Private Pensions Committee – whose Delegates are present today, taking a break from their meetings this week – and Professor Mark Pieth, former Chair of the OECD Working Group on Bribery, found their way back to the OECD to join us today. And Giada Vercelli who was with us last year has kindly agreed to connect the dots in moderating the panel.
There will be many takeaways as we will cover a wide range of topics, from global economic headwinds to some of the structural impediments that hold back growth. We will look at policies, regulations and industry practices that create perverse incentives and block business efficiency, and we will cover challenges for equity markets, long-term financing, pension and life insurance systems as well as legal issues such as anti-bribery regimes and investment treaty protection – and all that before lunch!
A bleak outlook…
Last Wednesday, as part of the OECD Week and of our annual Ministerial Council Meeting, I presented the Spring 2016 edition of our Economic Outlook, together with Chief Economist Catherine Mann. The Ministerial was held under the motto "Enhancing Productivity for Inclusive Growth". We made it a call for action to get the world economy out of a low-growth trap. We are projecting global growth to continue to limp along at around 3% this year, and to pick up only modestly in the next. It could be lower if the many downside risks materialise – and I should say that Brexit is just one of them, even though the most immediate.
For the record, we have come out strongly against Brexit and documented in detail why it would be bad for the UK, for Europe and the world. Our estimates suggest that by 2020 the foregone GDP per household in the UK would be roughly equivalent to a month of disposable income for the average household, with nothing to show for it in exchange.
…with global headwinds…
And the Business and Finance Outlook that we present today expands on the concerns we expressed last week by focussing on two global headwinds: the reversal of the commodity supercycle that hinders investment, especially in excess capacity sectors; and the sluggish recovery in the advanced economies resulting from banking sectors that are still weak and continue to struggle with high levels of non-performing loans in many parts of the world.
It is easy to underestimate the size of the impact of the supercycle reversal. As the Outlook notes, at its recent peak, the share of global corporate investment accounted for by just two sectors, energy and materials, was 40%! But the full influence of the turn in commodity prices goes well beyond these two sectors. Corporate capital spending was flat in advanced economies in 2015 and declining in emerging markets.
…and challenges from a low-interest rate environment…
And to all this we have to add the current super-easy monetary policy and associated very low interest rates that distort financial investment and encourage leveraged risk-taking. These problems have been with us for a while now. In fact, the challenges of the low-growth low-interest rate environment were the theme of last year’s Business and Finance Outlook, which explored what we called the ‘global investment puzzle’, namely: at a time of easy money, why is there so little productive investment by firms in advanced countries? We also raised concerns that in this environment many pension funds and life insurers risk being unable to keep their financial promises.
…as well as fragmentation which is present at all levels …
But the Business and Finance Outlook identifies another problem: fragmentation. This is the unifying theme of this edition of the Outlook: “doing business in a fragmented world”. Fragmentation manifests itself in various forms and impedes business productivity and efficiency of investments, holding back the forces that contribute to economic progress. Let me just give you a few examples that we dissect in the Outlook, using microdata on companies, markets, regulations and laws:
First, the proliferation of equity trading venues – including the so-called ‘dark pools’ – creates fragmentation. Dark trading, much of it in off-exchange venues, accounts for more than one third of all equity trading in both Europe and the United States. This undermines price discovery and a healthy competition between trading venues, and can ultimately worsen companies’ access to financing. Regulatory initiatives will be required in order to maintain a level playing field among investors.
Second, fragmentation also blocks progress in the renewable energy power sector. This sector is critical to the implementation of the commitments to limit global warming that we made at COP21 last December. There is plenty of money available, but it is not being invested because of obstacles to move this capital into profitable projects. Creating the right framework conditions will be necessary to overcome these obstacles.
Third, a diversity of laws and legal regimes: Different legal arrangements across countries fragment the economic environment by treating similar activities differently.
The way out: the short and the long of it
This may sound very bleak, or even depressing. But where others see problems, we see challenges that policy makers have to tackle. If we want to get onto a path of stronger and more sustainable growth, we need to put policies in place that foster growth and put the pieces of our fragmented world back together in a more harmonious way.
There is no easy way out of the current low-growth trap: an accommodative monetary policy is necessary to keep us afloat, but it has to be complemented by other policies if we are to swim. Injecting more liquidity cannot help much on its own in this era of diminished and self-fulfilling expectations. Firms seeing little demand growth are cautious about expanding investment. Weak investment holds back capital deepening and hinders the pace at which innovation is embodied in capital. The result is slow productivity growth, which in turn makes households pessimistic about the pace of increase of living standards, causing them to be more cautious about increasing their consumption. And slow growth of consumption feeds back onto firms’ expectations about demand growth, resulting in weak investment. A vicious cycle!
To get out of this vicious circle we need to go structural, as we have been saying all along through this crisis. And we are saying it again.
But we also need policies with immediate impact: in many countries, fiscal spending can be expanded or reallocated to items like infrastructure, R&D and other long-term projects that can enhance growth not only through short-run demand but also long-run supply effects. And as we have shown, collective action, ideally involving all OECD countries, is key to reap the full benefits of such public investment.
So to address the challenges of low productivity, inequality and low growth we need to use all policy tools at our disposal in a concerted and coherent way. To complement monetary and fiscal policies, a broad range of measures targeting investment, innovation, competition, regulations, skills, labour mobility and financial market efficiency and resilience need to be deployed.
Ladies and gentlemen,
At the OECD we are thinking about economic and social challenges and how to address them; we are learning from data analysis and peer reviews, and from discussions with stakeholders, as we are today at this event. We are a “do tank”, helping to put more effective policies into action. It’s been eight years since the onset of the global crisis and the global economy has not yet recovered to healthy levels of growth. Productivity growth has slowed and inequality has been rising. We must reverse these trends. We must design, develop and deliver better policies for better lives.
Dear Ana, the floor is now yours.