Trade Tensions Put Global Economic Growth on a ‘Subpar’ Setting

© Reuters. Trade Tensions Put Global Economic Growth on a ‘Subpar’ Setting

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Trade tensions have derailed the global economy, plunging it onto a low-growth track that’s clouded by risks, according to the OECD’s latest outlook.

The report sticks to the gloomy tone long held by the Paris-based organization, which has warned that trade disruptions could ricochet throughout the world economy. Now that scenario has come to pass, with manufacturing production clobbered by tariffs, a sharp slowdown in investment, and confidence faltering.

Things could get worse still given the renewed tensions, which have expanded into a U.S. ban on China’s Huawei Technologies, the world’s second-biggest mobile phone maker. An index of global trade is already at a decade low, and a WTO measure is signaling continued weakness this quarter.

The OECD also flagged other risks, including weakness in manufacturing infecting services, a bout of financial stress from high private debt, or faltering domestic demand in China. While there were small upgrades to its forecasts for the U.S. and the euro area, they were completely overshadowed by the pessimistic mood of the report.

“The outlook remains weak and there are many downside risks that cast a dark shadow over the global economy and people’s well-being,” Chief Economist Laurence Boone said.

The OECD, which dramatically downgraded its economic projections in March, lowered its 2019 global forecast again on Tuesday, to 3.2% from 3.3%. It also cut its forecasts for Japan and Canada, although raised them for the euro area and the U.S. after a stronger-than-expected start to the year.

The increasingly fragile situation is pressuring policy makers to urgently find a response. Investors have increased bets on a U.S. interest-rate cut by the Federal Reserve this year, and Australia’s central bank chief said he’ll consider easing monetary policy next month.

But with many central banks having little scope to provide more stimulus, the OECD said the onus now falls on governments to repair multilateral negotiations and use any available fiscal space.

The first step should be to “reignite multilateral trade discussions,” and it warned that the new measures announced this month could double the impact of tariff increases on growth in China and the U.S. and have a ripple effect around the world.

As well as trade, China also faces domestic difficulties that could have a global impact. Despite signs of stabilization, the OECD said there are risks that policy stimulus could prove insufficient, provoking a slowdown in domestic demand. Spillovers would be even bigger if central banks still had little margin to react, it said.

“Growth is set to remain subpar as trade tensions persist, while contributing to the divide between people,” Boone said. “Governments can and must act together to restore growth that will be sustainable and benefit all.”

Trade Tensions Put Global Economic Growth on a ‘Subpar’ Setting

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