The Economy

OECD Lifts Global Growth Forecast on Resurgent U.S. Fiscal Policy

The OECD endorses a Trumpian fiscal stimulus and advises other countries to follow suit.
Sean AlloccaNovember 29, 2016
OECD Lifts Global Growth Forecast on Resurgent U.S. Fiscal Policy

Global economic growth is projected to rise over the next two years thanks to ongoing or projected changes to economic policies. It will also be buoyed in part by a Trump administration that is expected to follow an expansionary fiscal policy in the United States.

The world economy is expected to grow 3.3% in 2017, up from 3.2% in the previous projection in September, according to a semi-annual forecast by the Organization for Economic Cooperation and Development. Projections were lifted higher for the following year as well, with GDP growth increasing to 3.6% in 2018.

“The global economy has the prospect of modestly higher growth,” said OECD Secretary-General Angel Gurría, “after five years of disappointingly weak outcomes.”

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Projected shifts in the fiscal stances of a number of major economies, including a new presidential administration in the U.S. and ongoing rebalancing in China, caused the modest increases, the OECD said. India and China, projected to grow by 7.6% and 6.4% in 2017, respectively, have the healthiest projections on average over the next two years. The 35-country OECD area is projected to grow by 2% in 2017 and 2.3% the following year.

With Trump eyeing plans for a large fiscal stimulus, U.S. domestic GDP is expected to rise 2.3% next year, up from a September forecast of 2.1%. The growth forecast improves to 3% in 2018 after Trump’s policies, if indeed they come to fruition, take hold.

A healthier U.S. economy could ripple throughout the rest of the world, according to the report. Increases to U.S. economic growth are expected to directly raise global growth by 0.1 percentage point in 2017 and an additional 0.3 percentage point in 2018.

The OECD urged policymakers to utilize a “window of opportunity” to lift global economies out of today’s low-growth trap by increasing public spending in the current low-interest environment.

“In light of the current context of low interest rates, policymakers have a unique window of opportunity to make more active use of fiscal levers to boost growth and reduce inequality without compromising debt levels,” Gurría said.

An annual increase in spending of 0.5% of GDP could be financed without increasing the debt-to-GDP ratio in the medium term, according to the report.

“On average, OECD economies could deploy deficit-financed fiscal initiatives for three to four years, while still leaving debt-to-GDP ratios unchanged in the long term,” the report said.

However, the OECD warned about a number of risk factors, including countries adopting trade protectionism stances to shelter jobs in the near term, that run the risk of impairing already weakened global trade.

Gurría said the projections aren’t a “blank cheque” for governments to spend at will, but to spend more wisely. The OECD is urging policymakers to institute targeted fiscal policies that focus on specific areas that can help boost economic growth, like high-quality infrastructure investment, innovation, and education and skills.