OECD Economic Outlook November 2015: Emerging market slowdown and drop in trade clouding global outlook
Global growth prospects have clouded this year. Global growth has eased to around 3%, well below its long-run average. This largely reflects further weakness in emerging market economies (EMEs). Deep recessions have emerged in Brazil and Russia, whilst the ongoing slowdown in China and the associated weakness of commodity prices has hit activity in key trading partners and commodity exporting economies, and increased financial market uncertainty.
Global trade growth has slowed markedly, especially in the EMEs, and financial conditions have become less supportive in most economies.
Growth in the OECD economies has held up this year, at around 2%, implying a modest reduction in economic slack, helped by an upturn in private consumption growth. However, business investment remains subdued, raising questions about future potential growth rates and about the extent to which stronger growth in the advanced economies can help to overcome cyclical weakness in the EMEs.
Sharp slowdown in EMEs is weighing on global activity and trade, and subdued investment and productivity growth is checking the momentum of the recovery in the advanced economies. Supportive macroeconomic policies and lower commodity prices are projected to strengthen global growth gradually through 2016 and 2017, but this outcome is far from certain given rising downside risks and vulnerabilities, and uncertainties about the path of policies and the response of trade and investment.
The outlook for the EMEs is a key source of global uncertainty at present, given their large contribution to global trade and GDP growth. In China, ensuring a smooth rebalancing of the economy, whilst avoiding a sharp reduction in GDP growth and containing financial stability risks, presents challenges. A more significant slowdown in Chinese domestic demand could hit financial market confidence and the growth prospects of many economies, including the advanced economies.
For EMEs more broadly, challenges have increased, reflecting weaker commodity prices, tighter credit conditions and lower potential output growth, with the risk that capital outflows and sharp currency depreciations may expose financial vulnerabilities. Growth would also be hit in the euro area, as well as Japan, where the short-run impact of past stimulus has proved weaker than anticipated and uncertainty remains about future policy choices.
There are increasing signs that the anticipated path of potential output may fail to materialise in many economies, requiring a reassessment of monetary and fiscal policy strategies. The risk of such an outcome underlines the importance of implementing productivity-raising structural policies, alongside measures to reduce persisting negative supply effects from past demand weakness in labour markets and capital investment, whilst ensuring that macroeconomic policies continue to support growth and stability. Early and decisive actions to spur reductions in greenhouse gas emissions via predictable paths of policy including tax reforms, or public investment programmes, or action on research and development might also help to support short-term growth and improve longer-term prospects.