Remarks by Angel Gurría,
Wednesday, 13 April 2016
Japan Prime Minister’s Office, Tokyo
(As prepared for delivery)
Dear Prime Minister, Ministers:
Thank you for the invitation to share with you our thinking on the global economic outlook and the challenges ahead.
A pickup in global growth remains elusive. Our latest projections show world GDP expanding by just 3% this year, the same as in 2015. We foresee only a modest improvement in 2017. Global growth rates over the past 5 years are well below long-run averages. Global trade growth, which is traditionally a reliable bellwether for the health of the world economy, remains strikingly sluggish at below 3%, lower than GDP growth, when it should be at least double, as it was during the period 1990-2007. Business investment has only recently returned to its pre-crisis level, and remains below it in some major countries. Emerging economies, which were the engine of growth during the past 10 years, have visibly slowed down. The lack of economic dynamism in the world economy persists despite the windfall of low energy prices and years of extraordinary monetary stimulus.
Among the major advanced economies, growth is most solid in the United States, where the domestic private‑sector-led recovery has been resilient in spite of headwinds from the strength of the dollar and declining energy sector investment. Steady and sustained employment gains, however, have not yet fed through to solid wage growth. As a result, the US cyclical recovery remains sub-par.
In the euro area, the ECB’s adoption of quantitative easing last year helped foster the recovery. Even so, low investment, high unemployment and, in some countries, sizeable non-performing loans, continue to limit growth.
The United Kingdom’s economy is losing momentum, reflecting in part the uncertainty regarding its future in the EU, an issue that is also affecting other major European economies.
China is hard to read. Growth has slowed, contributing to the large drop in commodity prices and to the weakness of global trade. The slowdown in China is a result of the rebalancing of the economy and of the need to address overcapacity in several industrial sectors. Our projection suggests a continued steady moderation of growth.
Growth in India is projected to remain robust, although further progress is needed in implementing structural reforms. Exporters of natural resources ─ like Brazil and Russia ─ will continue to undergo a painful adjustment process as their economies adapt to low commodity prices. Moreover, the outlook is clouded by political uncertainty in Brazil and economic sanctions in Russia.
These difficult conditions persist in the global economy against a backdrop of growing inequalities in income and opportunities, declining trend productivity growth, ongoing population ageing, and new challenges such as the refugee crisis in Europe.
With sub-standard global growth and low inflation as the base case, monetary policy should remain accommodative in advanced economies.
However, monetary policy on its own is insufficient to normalise economic conditions and deliver long‑term prosperity. We need a more balanced policy mix: greater use of fiscal and structural levers is required to complement accommodative monetary policy. Policy packages should take advantage of the complementarities between policies that support demand and those that enhance productivity and inclusiveness. Countries should use their available fiscal space to boost investment and prioritise structural policies to enhance access to and the quality of education, skills, health and innovation systems, thereby delivering a virtuous circle of higher productivity growth and greater social inclusion.
Let me now turn to Japan. We project modest growth of around 0.8% in 2016-17, especially if investment and wage growth do not strengthen. Weak activity in Japan’s key trading partners in Asia is not helping either.
Japan clearly needs a more balanced policy mix. Only by using all three arrows of Abenomics effectively will Japan be able to achieve a stronger, more inclusive growth path. While monetary policy easing has been exceptional, more progress is needed on structural policies, the third arrow of Abenomics. We congratulate Prime Minister Abe on major recent achievements, including participation in the TPP, the new corporate governance code and the expansion of childcare. However, further reforms are needed to strengthen competition and entrepreneurship, close the gender gap, upgrade skills, and improve the functioning of the labour market. The power of these policies is enormous. Let me highlight one example: if female labour force participation was to converge with that of men, GDP would be 20% higher!
Fiscal consolidation efforts must continue for Japan to put its debt ratio on a downward trend. The decision on how to implement the hike in the consumption tax to 10% next April should be based on economic conditions prevailing as we approach FY 2017. Thus, if such conditions allow, the full 2 percent increase would be implemented as presently planned. Otherwise, two consecutive 1 percent yearly hikes may be advisable. In either case, well-targeted fiscal measures to mitigate the temporary impact of the tax hike should be envisaged.
Looking further ahead, to achieve meaningful progress towards fiscal sustainability, the consumption tax rate will have to rise to at least 15% (the OECD average is around 20%). This would best be achieved by a sequence of annual 1 percent hikes, which would eliminate the “wall effect” that distorts consumer and business sentiment and decisions, as was the case in 2014.
Another priority for Japan is to bring idle nuclear reactors back online, once they meet the NRA’s stringent safety criteria. The Nuclear Energy Agency (NEA), our sister organisation, has stated that the NRA’s regulatory framework is in line with best practices. The recent court decision to reject an appeal to stop the operation of reactors in Sendai is a step in the right direction.
A joint commitment by G7 countries to make greater use of fiscal and structural policy levers to put growth back on track should be a deliverable from the summit in Ise-Shima.
A collective and coordinated approach would be particularly helpful to maximise positive spillovers. Many governments are currently able to borrow for long periods at very low interest rates, implying an effective increase in fiscal space. Furthermore, most countries have scope to reallocate spending towards more growth-friendly activities. With the rise in gross government debt in the OECD area from 75% of GDP in 2007 to 115% in 2015, we need to think of solutions that go beyond conventional fiscal stimulus. The key is to raise public investment in carefully selected projects, including infrastructure, education and skills, whose high growth impact would eventually allow a return to a fiscally sustainable path.
Such fiscal measures should be enhanced by collective efforts to reverse the recent slowdown in structural reform. Reforms to strengthen competition, promote labour market flexibility, upgrade science and technology, and achieve gender equality would create an environment more conducive to innovation and increased productivity. Such reforms would also help catalyse private investment.
We also need to step up global efforts to strengthen global governance and reverse the loss of trust caused by corruption, political and regulatory capture, and tax evasion and avoidance.
The release of the Panama Papers is yet another wake-up call for G7 countries to strengthen their commitment to enhance the integrity of the global tax system. G7 countries should lead by example, through intensifying their efforts to implement the Automatic Exchange of Information (AEoI) initiative, as well as the G20/OECD Base Erosion and Profit Shifting (BEPS) package. The OECD is also working closely with the IMF, UN and World Bank to create a joint tax platform to enhance developing countries’ capacity for domestic resource mobilisation. G7 countries could commit to support this platform as another deliverable. The issue of transparency of beneficial ownership should also be addressed.
Another important area for possible G7 action is gender equality. The fact that Prime Minister Abe has made “womenomics” a top priority makes it especially suitable for this year’s summit. The G7 could establish goals for promoting women’s engagement in science, technology, engineering and mathematics (STEM). And they could task the OECD with setting up a peer review mechanism to monitor progress in reducing gender gaps in education, employment and entrepreneurship.
These are just a few ideas for G7 themes. There are others ─ like health, education, trade, clean investment, and the Deauville Partnership ─ that appear in more detail in the handout that we have distributed for this meeting.
I thank you again for the opportunity to address you today, and I look forward to your questions.