The Economy

Global Economy Stuck in Low-Growth Trap: OECD

The organization says governments must take urgent action to put economies on a high-growth path or risk falling back into another recession.
Katie Kuehner-HebertJune 2, 2016

The Organization for Economic Cooperation and Development has downgraded its forecast for economic growth, saying the global economy is stuck in a “low-growth trap” that governments urgently need to address through comprehensive national fiscal initiatives.

In its latest Global Economic Outlook, the OECD predicts global gross domestic product growth in 2016 will be flat at 3% due to weak trade growth, sluggish investment, subdued wages, and slower activity in key emerging markets. Growth is expected to improve to only 3.3% in 2017.

The forecasts for both years are down about 0.3% from the OECD’s projections in its last Outlook report in November 2015.

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“We see the world economy stuck in a low-growth trap,” OECD Secretary-General Angel Gurría said, urging “comprehensive policy action … to ensure that we get off this disappointing growth path and propel our economies to levels that will safeguard living standards for all.”

OECD Chief Economist Catherine Mann said policymakers should coordinate fiscal and structural policies rather than relying on monetary policies such as stimulus packages used by central banks in the U.S., euro zone, U.K. and Japan to propel economies to the “high-growth path.”

“Monetary policy has been the main tool, used alone for too long,” she said. “In trying to revive economic growth alone, with little help from fiscal or structural policies, the balance of benefits-to-risks is tipping.”

For the U.S. economy, the OECD predicted growth of 1.8% this year, down from 2.5% in November and 2% in an interim report in February. The forecast for the Eurozone economy is 1.6% and Japan’s economic growth is projected at 0.7%.

The organization also warned that a U.K. vote to leave the European Union “would trigger negative economic effects on the U.K., other European countries, and the rest of the world,” causing economic uncertainty and hindering trade growth.

“The longer the global economy remains in the low-growth trap, the more difficult it will be to break the negative feedback loops, revive market forces, and boost economies to the high-growth path,” Mann said. “As it is, a negative shock could tip the world back into another deep downturn.”