OECD INTERIM

ECONOMIC OUTLOOK

High uncertainty
weighing on global growth
20 September 2018

Laurence Boone
OECD Chief Economist
http://www.oecd.org/eco/outlook/economic-outlook/
ECOSCOPE blog: oecdecoscope.wordpress.com
 Key messages

Global growth is peaking and is less synchronised

• Global growth should plateau at 3.7% in 2018 and 2019

• The job market has recovered but slack remains and wage growth is disappointing

Risks are intensifying, uncertainty is widespread

• Rising trade restrictions risk hurting jobs and living standards
• Tightened financial conditions increase stress on a number of EMEs
• Political risks could prevent Europe from thriving
• Ten years after the crisis, some financial risks have built up again

Policies should aim to enhance resilience, productivity and inclusiveness

• Reduce policy uncertainty, especially for trade, to support confidence and investment
• Review fiscal policy to react in case of a downturn and prioritise investment
• Implement reforms to boost long-term productivity and opportunities for all

2
 Global growth may be peaking
and is less synchronised
World GDP growth plateaus GDP growth is dispersed
% y-o-y % y-o-y % y-o-y % y-o-y
United States Euro area Japan
4.5 4.5 3.0 3.0

4.0 4.0
2.5 2.5
3.5 3.5

3.0 3.0 2.0 2.0

2.5 2.5
1.5 1.5
2.0 2.0

1.5 1.5 1.0 1.0

1.0 1.0
0.5 0.5
0.5 0.5

0.0 0.0 0.0 0.0

Q2 2016 2017 Q2 2018 2019
2016 2017 2018 2018

Note: Right panel: triangles show annual projections for 2018 and 2019. 3
Source: OECD Economic Outlook database.
 Growth prospects have weakened
G-20 advanced economies G-20 emerging economies
September projections May projections September projections May projections
% y-o-y % y-o-y % y-o-y % y-o-y
2.4 2.4 5.6 5.6

2.2 2.2 5.4 5.4

2.0 2.0 5.2 5.2

1.8 1.8 5.0 5.0

1.6 1.6 4.8 4.8

1.4 1.4 4.6 4.6

2014 2015 2016 2017 2018 2019 2014 2015 2016 2017 2018 2019

4
Source: OECD Economic Outlook database.
 OECD Interim Economic Outlook projections

Real GDP growth revised slightly down

Year-on-year, %. Arrows indicate the direction of revisions since May 2018.

2017 2018 2019 2017 2018 2019

World 3.6 3.7 3.7 G-20 3.8 3.9 3.8

Australia 2.2 2.9 3.0 Argentina 2.9 -1.9 0.1

Canada 3.0 2.1 2.0 Brazil 1.0 1.2 2.5
Euro area 2.5 2.0 1.9 China 6.9 6.7 6.4
Germany 2.5 1.9 1.8 India1 6.7 7.6 7.4
France 2.3 1.6 1.8 Indonesia 5.1 5.2 5.3
Italy 1.6 1.2 1.1 Mexico 2.3 2.2 2.5
Japan 1.7 1.2 1.2 Russia 1.5 1.8 1.5
Korea 3.1 2.7 2.8 Saudi Arabia -0.7 1.7 2.6
United Kingdom 1.7 1.3 1.2 South Africa 1.2 0.9 1.8
United States 2.2 2.9 2.7 Turkey 7.4 3.2 0.5

Note: Difference in percentage points based on rounded figures. Dark green and dark orange for, respectively, upward and 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 points. 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. 5
1. Fiscal years starting in April.
 Trade tensions are beginning to bite

Trade growth has slowed Export orders have worsened

World merchandise exports, volume Global

All orders Manufacturing export orders

% q-o-q % q-o-q Normalised 3-month moving average
2.0 2.0 0.8 0.8

0.6 0.6
1.5 1.5
0.4 0.4

0.2 0.2
1.0 1.0
0.0 0.0

-0.2 -0.2
0.5 0.5

-0.4 -0.4

0.0 0.0 -0.6 -0.6

2016 2017 2018 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18

Note: Left panel: Seasonally-adjusted, in USD at constant prices. Right panel: Data normalised over the 2004-2018 period. All orders
refer to the composite PMI (manufacturing and services). 6
Source: CPB; Markit; and OECD calculations.
 New trade restrictions:
Targeted sectors take a hit
US imports of steel articles US exports of vehicles
Total From China % y-o-y % y-o-y
% y-o-y % y-o-y Total To China
30 30 20 20

10 10
20 20

0 0
10 10

-10 -10
0 0
-20 -20
-10 -10
-30 -30

-20 -20
-40 -40

-30 -30 -50 -50

-40 -40 -60 -60

Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18

Note: Percentage changes in USD value. 7

Source: United States International Trade Commission; and OECD calculations.
 Investment growth is too weak
to support productivity gains
Productive capital stock growth Productivity growth
United States Euro area Japan % y-o-y % y-o-y % y-o-y
% y-o-y 2000-2007 2015-2017 2017Q2-2018Q2
3.0 3.0 2.0 2.0

2.5 2.5
1.5 1.5

2.0 2.0

1.0 1.0
1.5 1.5

1.0 1.0
0.5 0.5

0.5 0.5

0.0 0.0
0.0 0.0

-0.5 -0.5 -0.5 -0.5

2002 2004 2006 2008 2010 2012 2014 2016 2017 United States Euro area Japan

Note: Right panel: Labour productivity growth rates, annual averages. 8

Source: OECD Economic Outlook database; and OECD calculations.
 Unemployment is falling but too many
people remain out of employment
Euro area United States
Unemployment, involuntary part-time work and Unemployment and labour force participation rates
% marginally attached workers % %
25 10
Unemployment (lhs)
9 76
Wider unemployment
20 8

7 75
15 6
+8pp
+6pp 5
74
10 4
Unemployment Labour force participation (rhs)
3
2008-2018: -2pp
73
5 2

0 0 72
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Q2 Q2
Note: Unemployment and wider unemployment rates among active labour force aged 15-64 years. Labour force participation rate among
population aged 15-64 years. Wider unemployment rate refers to U6 unemployment and includes unemployed, involuntary part-time
9
workers and marginally attached workers.
Source: OECD Short-Term Labour Market statistics; National Labour Force Surveys; and OECD calculations.
 Wage growth lags behind pre-crisis levels
in some countries
Wage growth
Average annual change in real wages
% y-o-y % y-o-y
2000-2007 2015-2017 2018H1
3.5 3.5

3.0 3.0

2.5 2.5

2.0 2.0

1.5 1.5

1.0 1.0

0.5 0.5

0.0 0.0

-0.5 -0.5
United States Japan Germany France United Kingdom

Note: 2018H1 for year-on-year growth in % over 2017H1. Growth rates are annualised. 10
Source: OECD Economic Outlook database; and OECD calculations.
 RISKS ARE INTENSIFYING,
UNCERTAINTY IS WIDESPREAD

11
 An escalation in trade restrictions
would harm investment, growth and jobs
Jobs dependent on foreign final demand
2015 or latest available

% Share of business sector jobs (lhs) Number of jobs (rhs) million

50 15

40 12

30 9

20 6

10 3

0 0
DEU KOR ESP ITA FRA GBR RUS ZAF CAN TUR IDN MEX IND AUS CHN JPN USA BRA

Note: The business sector corresponds to ISIC Rev.3 Divisions 10 to 74.

Source: Preliminary estimates based on OECD Inter-Country Input-Output Database; OECD Annual National Accounts Database; OECD
12
Structural Analysis (STAN) Database; OECD Trade in Employment Database; World Input-Output Database (WIOD); and OECD
calculations.
 Rising US rates and home-grown imbalances
create turbulence in some EMEs
Exchange rates
vis-à-vis USD
Argentina Brazil South Africa Turkey India China
Jan 18 = 100
110

100

90

80

70
Depreciation against USD

60 TUR: -41%

50
ARG: -53%

40
Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18
Note: Data are indexed to 01-Jan-2018. Data as of 18 September 2018. 13
Source: Thomson Reuters; and OECD calculations.
 Emerging markets with external imbalances
are more vulnerable
External debt Current account balance
% of GDP 2017 1995 % of GDP 2017 1995 % of GDP
% of GDP
90 90 15 15

80 80
10 10
70 70

60 60
5 5
50 50

40 40
0 0
30 30

20 20
-5 -5

10 10

0 0 -10 -10
BRA

RUS
ARG
CHN

MYS
PHL
THA

MEX

TUR
CHL

HUN
IDN
IND

COL
ZAF

POL

POL
PHL
MYS

MEX
IDN
IND

COL
THA
HUN

ZAF

TUR
RUS
CHN

BRA
CHL

ARG
Note: Gross external debt is the outstanding amount of those actual current, and not contingent, liabilities that require payment of principal
and/or interest by the debtor at some point(s) in the future and that are owed to nonresidents by residents of an economy. 14
Source: IMF Balance of Payments and International Investment statistics; and OECD calculations.
 Political risks could hamper Europe’s
growth and social cohesion
UK-EU trade relationship Government bond yields
Exports 2-year yields
Italy Spain Portugal
World excl. EU World excl. UK
% %
% of GDP EU UK % of GDP 3.5 3.5
16 35
3.0 3.0
14 30

12 2.5 2.5
25
10 2.0 2.0
20
8 1.5 1.5
15
6
1.0 1.0
10
4
0.5 0.5
2 5
0.0 0.0
0 0
Goods Services Goods Services
-0.5 -0.5
United Kingdom European Union (rhs) 2014 2015 2016 2017 2018

Note: Left panel: Data as of 2016 for services and 2017 for goods. Exports and GDP of the European Union excludes those of the UK.
Source: OECD International Trade in services statistics; UN Comtrade database; OECD Economic Outlook database; Thomson Reuters; 15
and OECD calculations.
 Ten years after the crisis,
financial risks have built up again
Change in total debt Equity prices
2005-2017
Households Non-financial corporates
Private sector (EMEs) Government S&P 500 NASDAQ EuroStoxx Nikkei 225
2017* total debt (rhs) Jan-2007 = 100 Jan-2007 = 100
% pts of GDP % of GDP 350 350
120 600

100 500 300 300

80 400
250 250
60 300
200 200
40 200

20 100 150 150

0 0 100 100

-20 -100
50 50
-40 -200
0 0
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
Note: Left panel: *Total debt levels, 2017 or latest available. **EMEs excluding China. Private debt ratios shown are computed on a
consolidated basis except for Canada, Japan and the United States for which consolidated data are not available. Public debt ratios are
based on the national accounts definitions except for EU countries where debt ratios based on Maastricht criteria are shown. Data for
China and EMEs are credit.
16
Source: OECD National Accounts database; Bank for International Settlements; OECD Economic Outlook database; Thomson Reuters;
and OECD calculations.
POLICIES SHOULD AIM TO ENHANCE
RESILIENCE, PRODUCTIVITY AND
INCLUSIVENESS

17
 The monetary policy stance in major
economies is appropriate
Inflation in major advanced economies
Consumer price inflation, excluding food and energy

United States Japan Euro area

% %
2.5 2.5

2.0 2.0

1.5 1.5

1.0 1.0

0.5 0.5

0.0 0.0

-0.5 -0.5
2015 2016 2017 2018
Note: Core inflation excludes energy and food products and refers to harmonised data for the euro area. Inflation numbers affected by the
effects of the 2014 tax hike in Japan are not shown. 18
Source: OECD Main Economic Indicators Database.
 Fiscal policies should avoid being procyclical
and should focus on the long term
Change in the fiscal stance Change in public debt
2017-2019, projected 2017-2019, projected
% pts of potential GDP % pts of potential GDP % pts of GDP % pts of GDP
1.0 1.0 5 5
Tightening 4 4
0.5 0.5
3 3
0.0 0.0 2 2

1 1
-0.5 -0.5
0 0
-1.0 -1.0
Easing -1 -1

-1.5 -1.5 -2 -2

-3 -3
-2.0 -2.0
-4 -4

-2.5 -2.5 -5 -5
United States Euro area Japan United States Euro area Japan
Note: Left panel: The fiscal stance is measured as the underlying primary balance, in % of potential GDP. Right panel: Public debt based
on the national accounts definition except for EA countries where public debt based on Maastricht criteria is shown. Therefore, debt
numbers are not fully comparable between EA and non-EA countries. 19
Source: OECD Economic Outlook database; and OECD calculations.
 Fiscal space is uneven:
Investment should be prioritised

Public debt, % of GDP

250

200
Strong case for more public
2018
Japan investment in some
150
countries
2007 Higher returns to
public investment
Note: Public debt2018
based on the national accounts definition except for EA
Other countries could
125 countries where public debt based on Maastricht criteria is shown. Therefore,
debt numbers are not fully comparable2018
between EA and non-EA countries. benefit but lack fiscal space
Source: OECD Economic Outlook database; and OECD calculations. More
2018 fiscal
2007
2018 space
100 Italy
2018 Priorities: rebuild buffers
and invest in future growth
75
2007 Canada
United States Germany
France 2018 Coordinated fiscal action
United Kingdom
50 yields larger gains
-1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0
Nominal GDP growth rate minus 10-year yield on government bonds, % pts

Note: Data for 2018 are projections. Public debt based on the national accounts definition except for EU countries where public debt based
on Maastricht criteria is shown. Therefore, debt numbers are not fully comparable between EU and non-EU countries. 20
Source: OECD Economic Outlook database; and OECD calculations.
 Ten years later: Banks are stronger
but much remains to be done
Banks are better capitalised Financial fragilities remain in the euro area
Regulatory Tier 1 capital to risk-weighted assets Share of own-government securities
in bank holdings of euro area sovereign debt
% 2017 2008 % % 2018 2008 %
25 25 100 100

90

80 80
20 20
70

60 60

15 15 50

40 40

30
10 10
20 20

10

5 5 0 0
AUS CAN ESP USA ITA PRT FRA BEL DEU GBR IRL ITA FRA GRC ESP PRT DEU AUT BEL NLD FIN IRL

21
Source: IMF Soundness Indicators database; ECB Statistical Data Warehouse, European Central Bank; and OECD calculations.
 The real economy has not regained
the ground lost during the crisis
Real GDP per capita, OECD
Index 2000 = 100 Actual GDP per capita Pre-crisis trend potential GDP per capita, 2000-2007 Index 2000 = 100
140 140

135 135

130 130

125 125

120 120

115 115

110 110

105 105

100 100
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Note: The dotted line shows a linear projection based on the average annual growth rate of OECD potential GDP per capita in the 2000-
2007 period. 22
Sources: OECD Economic Outlook database; and OECD calculations.
 Focus on people to raise well-being, improve
opportunities and address political tensions
Education, skills and labour policies are key
Share of priority recommendations followed by action

Fully implemented or in process of implementation No action taken in 2017

%
0 10 20 30 40 50 60 70 80 90 100
Higher reform
effort
Access to quality childcare and early education

Improved active labour market policies

Vocational education, training and apprenticeships

Reduction in the tax wedge on low-skilled workers

Support for disadvantaged schools and students

Alignment of higher education to labour market needs Lower reform

effort
0 10 20 30 40 50 60 70 80 90 100 %

Note: Refers to reform priorities identified in Going for Growth in 2017 for the 35 OECD economies, Argentina, Brazil, China, Colombia,
Costa Rica, India, Indonesia, Russia and South Africa. 23
Sources: OECD Going for Growth 2018; and OECD calculations.
 Key messages

Global growth is peaking and is less synchronised

• Global growth should plateau at 3.7% in 2018 and 2019

• The job market has recovered but slack remains and wage growth is disappointing

Risks are intensifying, uncertainty is widespread

• Rising trade restrictions risk hurting jobs and living standards
• Tightened financial conditions increase stress on a number of EMEs
• Political risks could prevent Europe from thriving
• Ten years after the crisis, some financial risks have built up again

Policies should aim to enhance resilience, productivity and inclusiveness

• Reduce policy uncertainty, especially for trade, to support confidence and investment
• Review fiscal policy to react in case of a downturn and prioritise investment
• Implement reforms to boost long-term productivity and opportunities for all

24