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OECD ECONOMIC OUTLOOK

Growth has peaked amidst


escalating risks
21 November 2018

Ángel Gurría
OECD Secretary-General

Laurence Boone
OECD Chief Economist

http://www.oecd.org/eco/outlook/economic-outlook/
ECOSCOPE blog: oecdecoscope.wordpress.com
Key messages

Global growth is slowing

Clouds are gathering on the horizon

Enhance cooperation and prepare for more difficult times

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Global GDP growth is losing momentum

World G-20 Advanced G-20 Emerging

May projections September projections November projections


% y-o-y
% y-o-y % y-o-y
4.0 2.4 5.6

3.9 2.3 5.5

3.8 2.2 5.4

3.7 2.1 5.3

3.6 2.0 5.2

3.5 1.9 5.1

3.4 1.8 5.0

3.3 1.7 4.9


2017 2018 2019 2020 2017 2018 2019 2020 2017 2018 2019 2020

Note: G-20 advanced economies are Australia, Canada, France, Germany, Italy, Japan, Korea, the United Kingdom and the United States.
G-20 emerging economies are Argentina, Brazil, China, India, Indonesia, Mexico, Russia, Saudi Arabia, South Africa and Turkey.
Source: OECD Economic Outlook database; and OECD calculations.
OECD Economic Outlook projections

Real GDP growth revised down


Year-on-year, %. Arrows for 2018 and 2019 indicate the direction of revisions since September 2018.*

2018 2019 2020 2018 2019 2020


World 3.7 3.5 3.5
G-20 3.8 3.7 3.7

Australia 3.1 2.9 2.6 Argentina -2.8 -1.9 2.3


Canada 2.1 2.2 1.9 Brazil 1.2 2.1 2.4
Euro area 1.9 1.8 1.6 China 6.6 6.3 6.0
Germany 1.6 1.6 1.4 India1 7.5 7.3 7.4
France 1.6 1.6 1.5 Indonesia 5.2 5.2 5.1
Italy 1.0 0.9 0.9 Mexico 2.2 2.5 2.8
Japan 0.9 1.0 0.7 Russia 1.6 1.5 1.8
Korea 2.7 2.8 2.9 Saudi Arabia 1.7 2.6 2.5
United Kingdom 1.3 1.4 1.1 South Africa 0.7 1.7 1.8
United States 2.9 2.7 2.1 Turkey 3.3 -0.4 2.7

*The OECD Economic Outlook includes for the first time projections up to 2020.
Note: Dark orange for downward revisions of 0.3 percentage points and more. Light green and light orange for, respectively, upward and
downward revisions of less than 0.3 percentage point. Difference in percentage points based on rounded figures. The European Union is a
full member of the G-20, but the G-20 aggregate only includes countries that are also members in their own right. 4
1. Fiscal years starting in April.
OECD Economic Outlook projections

Real GDP growth


Non-G-20 economies, year-on-year, %

2018 2019 2020 2018 2019 2020


Austria 2.6 1.9 1.9 Latvia 4.7 3.9 3.3
Belgium 1.5 1.4 1.4 Lithuania 3.4 2.9 2.6
Chile 4.1 3.7 3.4 Luxembourg 3.0 2.9 3.2
Colombia 2.8 3.3 3.4 Netherlands 2.9 2.5 2.1
Costa Rica 2.9 3.0 3.3 New Zealand 2.9 2.8 2.6
Czech Republic 3.0 2.7 2.6 Norway 1.6 1.9 2.3
Denmark 1.2 1.9 1.6 Poland 5.2 4.0 3.3
Estonia 3.3 3.5 2.3 Portugal 2.2 2.1 1.9
Finland 2.8 1.8 1.6 Slovak Republic 4.1 4.3 3.6
Greece 2.1 2.2 2.1 Slovenia 4.4 3.6 2.7
Hungary 4.6 3.9 3.3 Spain 2.6 2.2 1.9
Iceland 3.8 2.8 2.6 Sweden 2.5 1.9 1.9
Ireland 5.9 4.1 3.4 Switzerland 2.9 1.6 1.6
Israel 3.6 3.5 3.3 Tunisia 2.6 3.1 3.3

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Activity is losing steam

Global short-term activity Global business expectations


% y-o-y Industrial production growth % y-o-y
Index 100 = Index 100 =
Retail sales volume growth 2015-2018 average 2015-2018 average
5 5
Future output New business
104 104

4 4
102 102

3 3
100 100

2 2
98 98

1 1 96 96

0 0 94 94
2015 2016 2017 2018 2015 2016 2017 2018
Note: Left panel: industrial production and retail sales aggregated using purchasing power parity weights. Data for retail sales volume
growth are retail sales in the majority of countries, but monthly household consumption is used for the United States and the monthly
synthetic consumption indicator is used for Japan. Retail sales data are not available for India. Estimates for 18Q3 based on data for the
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three months up to August. Right panel: Global composite PMI, 3-month moving average, data as of October 2018.
Source: OECD Economic Outlook Database; Thomson Reuters; Markit; and OECD calculations.
Trade growth is decelerating

Manufacturing new export orders Container port traffic


Global United States
Index Germany China Index % changes, a.r. % changes, a.r.
65 65 12 12
Quarter-on-quarter Year-on-year

Expanding 10 10

60 60 8 8

6 6

4 4
55 55

2 2

0 0
50 50
-2 -2
Contracting
-4 -4
45 45 2015 2016 2017 2018
2015 2016 2017 2018

Note: Right panel: Data from 88 ports worldwide. 7


Source: Markit; Institute of Shipping Economics and Logistics; and OECD calculations.
Fiscal and monetary policies:
taking the foot off the accelerator
Central bank total assets Change in general government
United States Euro area Japan
primary balance
% pts of potential % pts of potential
% of GDP % of GDP GDP GDP
2016-2018 2018-2020
100 100 1.6 1.6

90 90
1.2 1.2
80 80
0.8 Tightening 0.8
70 70

60 60 0.4 0.4

50 50 0.0 0.0
40 40
-0.4 -0.4
30 30
-0.8 -0.8
20 20

10 10 -1.2 Easing -1.2

0 0 -1.6 -1.6
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 USA CAN ITA OECD Euro FRA JPN DEU GBR
area
Note: Right panel: the OECD aggregate measures the change for the median OECD country over the periods shown.
Source: Board of Governors of the Federal Reserve System; Bank of Japan; European Central Bank; OECD Economic Outlook 8
database; and OECD calculations.
Labour shortages are rising
but employment can still improve
Labour shortages Employment rates
Based on business surveys Change between 2007 and 2017
United States Euro area Japan % pts
% pts
Normalised Normalised
8 8
4 4

6 6
3 3

4 4
2 2
2 2
1 1
0 0

0 0
-2 -2

-1 -1
-4 -4

-2 -2 -6 -6

Note: Left panel: Data normalised over the 2002-2018 period. Right panel: the employment rate is defined as the number of employed
people as a share of the working-age population (15 to 64 years old).
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Source: OECD Economic Outlook database, National Federation of Independent Business; European Commission; Bank of Japan;
and OECD calculations.
Wages and prices are set to rise moderately

Wage growth Inflation


Average annual growth in nominal wages Consumer price inflation, excluding food and energy

% 1995-2007 2008-2017 2018-2020 (projected) % United States Euro area Japan


% %
5 5 3.0 3.0

4 4 2.5 2.5

2.0 2.0
3 3

1.5 1.5
2 2
1.0 1.0

1 1
0.5 0.5

0 0 0.0 0.0

-0.5 -0.5
-1 -1
United States Euro area Japan 2015 2016 2017 2018 2019 2020
Note: Right panel: Core inflation excludes energy and food products and refers to harmonised data for the euro area. Inflation numbers for
Japan are adjusted for the 2014 and planned 2019 consumption tax hikes. 10
Source: OECD Economic Outlook Database; and OECD calculations.
CLOUDS ARE GATHERING
ON THE HORIZON

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Widespread trade restrictions would
disrupt value chains, hurting jobs
Exports and imports of goods

Note: The size of a bubble represents the share of world trade in value-added terms (exports plus imports of value added) of that country or
economic area. The thickness of the lines between two bubbles measures the amount of bilateral value-added trade between two trading
partners. There are bilateral trade flows between all economies shown but those below approximately 0.2% of total world trade flows are not
shown. Dynamic Asia Economies (DAE) include Chinese Taipei; Hong Kong, China; Indonesia; Malaysia; the Philippines; Singapore; and
Thailand. Other emerging markets (OEM) include the remaining 129 countries in the world and account for around 10% of world trade. 12
Source: Gephi; IMF Direction of Trade Statistics database; OECD Economic Outlook database; and OECD Calculations.
Tariff hikes act as a brake
on GDP growth
Impact on GDP and trade by 2021, per cent difference from baseline
%
0.0

-0.4

-0.8

-1.2

-1.6

-2.0
USA GDP China GDP World GDP World Trade Trade excl. USA &
China

Note: Current tariffs include all tariffs imposed on bilateral US-China trade in 2018 up to the end of September. The purple scenario shows
the additional impact of the United States raising tariffs on $200 billion of imports from China from 10% to 25% from January 2019 (with
reciprocal action by China on $60 billion of imports from the United States). The orange scenario shows the additional impact if tariffs of
25% are imposed on all remaining bilateral non-commodity trade between China and the United States from July 2019. The red scenario
shows the additional impact of related uncertainty resulting in a rise of 50bp in investment risk premia in all countries in 2019-2021. 13
Source: OECD calculations.
Weaker investor confidence towards EMEs
would drag down growth
Output effect of higher interest rates in emerging-market economies
GDP impact of a 1 percentage point rise in investment risk premia in all EMEs, difference from baseline
% 2019 2020 %
0.0 0.0

-0.1 -0.1

-0.2 -0.2

-0.3 -0.3

-0.4 -0.4

-0.5 -0.5

-0.6 -0.6
Brazil Indonesia Russia China non-OECD India Mexico South Africa OECD
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Source: OECD calculations.
A slowdown in China
would weigh on growth across the world
GDP growth impact of a negative demand shock of 2% pts in China
First year
% pts % pts
0.0 0.0

-0.1 -0.1

-0.2 -0.2

-0.3 -0.3

-0.4 -0.4
United States Euro area Germany Japan East Asia Commodity
exporters

Note: Based on a decline of 2 percentage points in the growth rate of domestic demand in China for two years. Policy interest rates are
endogenous in all areas. “Commodity exporters” include: Australia, Brazil, Indonesia, Russia, South Africa and the other oil producers.
All countries and regions are weighted using purchasing power parities. 15
Source: OECD calculations.
A materialisation of risks
could deepen asset price corrections
Equity prices have fallen recently Stock valuations remain elevated
Cyclically adjusted average Price/Earnings ratios

Jan. 2017 = 100 Jan. 2017 = 100 United States Euro area Japan
130 130 40 40
S&P 500 EuroStoxx TOPIX
125 125 35 35

120 120 30 30

115 115 25 25

110 110 20 20

105 105 15 15

100 100 10 10

95 95 5 5

90 90 0 0
Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Note: Data as of 19 November 2018. 16


Source: OECD Economic Outlook database; Thomson Reuters; and OECD calculations.
Political risks in the euro area
may weigh on credit growth
Sovereign spreads have risen in Credit growth to firms remains low
Italy, but contagion is limited Banking credit to non-financial corporations
Italy Germany France Spain
% Italy Portugal Spain Ireland % % y-o-y % y-o-y
4.5 4.5 35 35

4.0 4.0 30 30

3.5 3.5 25 25

20 20
3.0 3.0
15 15
2.5 2.5
10 10
2.0 2.0
5 5
1.5 1.5
0 0
1.0 1.0 -5 -5

0.5 0.5 -10 -10

0.0 0.0 -15 -15


Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 2004 2006 2008 2010 2012 2014 2016 2018
Note: Left panel: Sovereign spreads refer to the difference between the yield on a country's 10-year bond issue and the yield on a bond
issued by Germany as a benchmark country. Data as of 19 November 2018. Right panel: Banking credit, adjusted for sales and
securitisation, from domestic banks to euro area non-financial corporations. 17
Source: Thomson Reuters; European Central Bank; and OECD calculations.
A combination of risks could amplify each
other and seriously erode growth
Higher tariffs on US-China trade, higher EME interest rates and higher oil prices
Difference from baseline GDP
% 2019 2020 %
0.0 0.0

-0.2 -0.2

-0.4 -0.4

-0.6 -0.6

-0.8 -0.8

-1.0 -1.0

-1.2 -1.2
China United States Brazil India World OECD Euro area Japan
Note: Combined effects of an increase of 20 USD per barrel in oil prices, an increase of 1 percentage point in investment risk premia in all
emerging-market economies and a 25 per cent tariff on US-China bilateral trade from 2019 onwards. All shocks are assumed to last for five
years. Effect on GDP at constant prices. 18
Source: OECD calculations.
GOVERNMENTS SHOULD ENHANCE
COOPERATION AND PREPARE FOR
MORE DIFFICULT TIMES

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Revive cooperation to reduce trade barriers
and regulatory differences
Tariffs and non-tariff measures
% Tariff rate Tariff equivalent of NTMs %
14 14

12 12

10 10

8 8

6 6

4 4

2 2

0 0
United Japan European Canada Mexico Indonesia China Russia India Brazil
States Union
Note: Ad valorem equivalents, average across products and partner countries. The non-tariff measure estimate includes sanitary and
phytosanitary measures, technical barriers to trade, border control measures, and quantitative restrictions. The European Union excludes
intra-EU trade. 20
Source: OECD calculations, based on the METRO model and Cadot et al. (2018).
Coordinated action will be needed in a downturn

Long-term interest rates remain low Impact of a coordinated fiscal stimulus


Yield on 10-year government bond issues, 15-day m.a. Global GDP, % difference from baseline
% United States Japan Germany France % % Fiscal easing with fixed monetary policy rates %
5 5 0.6 0.6

4 4
0.4 0.4

3 3

2 2 0.2 0.2

1 1
0.0 0.0

0 0

-1 -1 -0.2 -0.2
2008 2010 2012 2014 2016 2018 2019 2020 2021 2022
Note: Left panel: Data as of 19 November 2018. Right panel: The fiscal scenario is a coordinated global fiscal easing of 0.5% of GDP
sustained for three years, with policy interest rates held fixed for three years. Simulations on the NiGEM global macroeconomic model, with
model-consistent expectations. 21
Source: OECD Economic Outlook database; and OECD calculations.
A common fiscal capacity would help
the euro area to smooth downturns
GDP growth stabilisation effect
Difference in annual growth for the euro area achieved by the fund
% Global Financial crisis Euro area crisis %
0.8 0.8

0.6 0.6
Higher growth

0.4 0.4

0.2 0.2

0.0 0.0

-0.2 -0.2

-0.4 -0.4
2002 2004 2006 2008 2010 2012 2014 2016
Note: The unemployment benefits re-insurance scheme is a stabilisation mechanism for the euro area. Support from the fund, triggered
when the unemployment rate increases to high levels, is proportional to the size of the crisis. A participating country pays 0.1% of GDP per
year when the fund issues debt and an additional charge of 0.05% of GDP for every year support was received in the past 10 years.
Counterfactual simulations on GDP show that for an average annual contribution of 0.2% of GDP, the fund could achieve significant
stabilisation while avoiding permanent transfers between countries. 22
Source: OECD 2018 Euro area Economic Survey, Claveres; G. and J. Stráský (2018); and OECD calculations.
Raising skills and improving labour markets
helps increase wages and reduce inequality
Wage and productivity growth
Real wages, OECD countries
Index 1995 = 100 Labour productivity Average wages Median wages Index 1995 = 100
135 135

130 130
Contribution of declining
labour share
125 125

120 120

115 115

110 110
Contribution of increased
105 wage inequality 105

100 100
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
23
Source: OECD Economic Outlook November 2018, chapter 2.
Product market reforms would
help reduce productivity gaps
Productivity divergence
Manufacturing and services
Index 2003 = 100 Index 2003 = 100
160 160
Frontier
150 150

140 140

130 130

120 120
Firms below the frontier
110 110

100 100

90 90
2003 2005 2007 2009 2011 2013 2015

Note: The frontier is measured by the average of log labour productivity for the top 5% of companies with the highest productivity levels
globally across 24 OECD countries, separately within each 2-digit industry and year. “Firms below the frontier” capture the log productivity
for all other firms, constructed in a similar way. The series are normalised to 100 in the starting year (2003=100) and the time variation is
approximated by changes in the log measures x 100. Services denote market services excluding the financial sector. 24
Source: OECD calculations using Orbis data of Bureau van Dijk, following the methodology in Andrews et al. (2016).
Key messages

Global growth is slowing


• Global growth is set to weaken on the back of slower trade growth and less supportive policies
• The OECD unemployment rate is at record low and wages are growing modestly
• Inflation has yet to pick up

Clouds are gathering on the horizon

• Tariff hikes are slowing growth and could disrupt value chains and jobs
• Emerging markets remain vulnerable to rising US rates and capital outflows
• Political and geopolitical risks increase uncertainty

Enhance cooperation and prepare for more difficult times

• Cooperation needed to reduce uncertainty, avoid protectionism, and act in face of a downturn
• Strengthen the euro area by completing the banking union and progressing on a common fiscal
capacity
• Step up action to reduce inequality and improve trust in governments 25