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OECD ECONOMIC OUTLOOK
Trade uncertainty dragging down global growth 21 May 2019
http://www.oecd.org/economy/economic-outlook/ ECOSCOPE blog: oecdecoscope.wordpress.com
Key messages Global economic growth is stabilising at a low level • Trade growth has plunged and investment has slowed due to high uncertainty • Manufacturing is weak, but strong labour markets and services are supporting consumption • A slight pick-up by 2020 will not be enough to boost living standards
Key risks: Trade tensions, China slowdown, high debt • Further increases in trade restrictions would hurt investment, workers and consumers • A sharp slowdown in China would hit activity across the world • Private, often risky, debt is building up
Governments must act urgently to reinvigorate growth that benefits all • Invest in infrastructure, digital transformation and skills to meet tomorrow’s challenges • In the euro area, combine structural with fiscal policies to stimulate activity • Resolve trade disputes through increased international cooperation while fixing the international rules-based system 2
Economic growth has slowed in sync with trade growth World trade volume growth
World GDP growth
Goods and services %
q-o-q a.r.
%
y-o-y
q-o-q a.r.
y-o-y
8.0
4.5
6.0
4.0
4.0 3.5 2.0 3.0 0.0 2.5
2016
2017
2016
2017
2019Q1
2019Q1 -2.0
Note: Figures for the first quarter of 2019 are based on currently available data and projections for the remaining economies. Source: OECD Economic Outlook database.
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OECD Economic Outlook projections Real GDP growth %, year-on-year
World Australia Canada Euro area Germany France Italy Japan Korea United Kingdom United States
2018 3.5
2019 3.2
2020 3.4
2.7 1.8 1.8 1.5 1.6 0.7 0.8 2.7 1.4 2.9
2.3 1.3 1.2 0.7 1.3 0.0 0.7 2.4 1.2 2.8
2.5 2.0 1.4 1.2 1.3 0.6 0.6 2.5 1.0 2.3
G20
2018 3.8
2019 3.4
2020 3.6
Argentina Brazil China India1 Indonesia Mexico Russia Saudi Arabia South Africa Turkey
-2.5 1.1 6.6 7.0 5.2 2.0 2.3 2.2 0.8 2.6
-1.8 1.4 6.2 7.2 5.1 1.6 1.4 2.5 1.2 -2.6
2.1 2.3 6.0 7.4 5.1 2.0 2.1 1.9 1.7 1.6
Note: The European Union is a full member of the G20, but the G20 aggregate only includes countries that are members in their own right. 1. Fiscal years starting in April.
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OECD Economic Outlook projections Real GDP growth %, year-on-year
Austria Belgium Chile Colombia Costa Rica Czech Republic Denmark Estonia Finland Greece Hungary Iceland Ireland Israel
2018 2.7 1.4 4.0 2.7 2.7 2.9 1.4 3.9 2.3 1.9 5.0 4.6 6.8 3.3
2019 1.4 1.2 3.4 3.4 2.7 2.6 2.1 3.2 1.5 2.1 3.9 1.0 3.9 3.1
2020 1.6 1.3 3.3 3.6 3.0 2.5 1.7 2.8 1.4 2.0 3.0 2.4 3.3 3.2
Latvia Lithuania Luxembourg Netherlands New Zealand Norway Poland Portugal Slovak Republic Slovenia Spain Sweden Switzerland
2018 4.8 3.5 2.6 2.6 2.8 1.4 5.1 2.1 4.1 4.5 2.6 2.4 2.5
2019 2.7 2.9 2.0 1.6 2.6 1.8 4.2 1.8 3.5 3.4 2.2 1.6 1.0
2020 2.7 2.5 2.5 1.5 2.5 2.1 3.5 1.9 3.4 3.1 1.9 1.6 1.5
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GDP and trade growth are set to stay weak despite a modest pick-up in 2020 Global GDP growth
Global trade growth
% , year-on-year
%, year-on-year
November projections March projections
November projections
May projections May projections excl. Turkey and Argentina
4.0
6.0
3.9
5.5
3.8
5.0
3.7
4.5
3.6
4.0
3.5
3.5
3.4
3.0
3.3
2.5
3.2
2.0
3.1
1.5
3.0
1.0
2017
2018
Source: OECD Economic Outlook database.
2019
May projections
2020
2017
2018
2019
2020 6
Support has come in the form of more accommodative financial conditions Changes between November 2018 and May 2019 averages Equity prices
10-year government bond yields
CHN ITA ZAF AUS FRA CAN IND EA BRA RUS DEU USA IDN GBR KOR MEX JPN TUR
CHN ITA ZAF AUS FRA CAN IND EA BRA RUS DEU USA IDN GBR KOR MEX JPN TUR -10
0
10
20
30 %
-1.5
Note: May 2019 average refers to the average over the period from April 18 to May 17. Source: Refinitiv; and OECD calculations.
-0.5
0.5
1.5
2.5 % pts 7
Fiscal policy has also provided a buffer, appropriately Fiscal stance % pts of potential GDP 2018
2019 (projected)
2020 (projected)
1.0 0.5 0.0 -0.5
Fiscal easing
-1.0 -1.5
Note: The fiscal stance is defined as the change in the underlying general government primary balance. Source: OECD Economic Outlook database.
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Manufacturing has deteriorated sharply but services hold up Global PMI Index
Manufacturing
56
Manufacturing new export orders
Services
Improvement
55 54 53 52 51 50 49 48
Decline
2015
2016
2017
2018
2019
9
Source: Markit; and OECD calculations.
Strong labour markets and services are keeping consumption resilient Wage growth
Employment shares by sector
Average annual growth in real wages %
2008-2017
2018-2020 (projected)
2.0
% 100
1.8
90
1.6
80
1.4
70
1.2
60
1.0
50
0.8
40 30
0.6
20
0.4
10
0.2
0
1995-2007
United States
Germany
Japan
0.0
United States
Euro area
Japan
Note: LHS panel: Data are for 2018 for the United States and for 2017 for Germany and Japan. For the United States, public and social sector include education, health, and public administration. Trade and hospitality include wholesale and retail trade, leisure and hospitality, and other services. Transport, finance and business services include transportation and utilities, information, financial activities, and professional and business services. For Germany and Japan, categories correspond to the respective ISIC Rev.4 categories. RHS panel: Growth rates are annualised. Real wages are defined as the ratio of total compensation per employee and the private consumption expenditure deflator. Source: BLS; OECD Employment Outlook database; OECD Economic Outlook database; and OECD calculations.
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China has launched a sizeable stimulus to offset slowing activity Credit growth
Infrastructure investment
% change of stocks, year-on-year
% change, year-on-year, nominal %
%
Total credit
30
20
25
15
20
Core shadow banking items
10 5
15 0 10 -5 5
0 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19
-10 -15 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19
Note: RHS panel: Core shadow banking includes entrusted loans, trusted loans and undiscounted bankers' acceptances. Source: CEIC; Bank for International Settlements; and OECD calculations.
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KEY RISKS: TRADE TENSIONS, CHINA SLOWDOWN, HIGH DEBT
Uncertainty is bringing down investment G20 fixed investment Contributions to % change, year-on-year, excluding China and Saudi Arabia % pts 6
United States
Euro area 'Big 3'
India
Other G20 advanced
Other G20 emerging
G20
5 4 3 2 1 0
-1 -2
2013
2014
2015
2016
2017
2018
Note: China and Saudi Arabia are not included due to lack of quarterly national accounts data. The euro area aggregate includes only Germany, France and Italy. Source: OECD Economic Outlook database; and OECD calculations.
13
Higher tariffs on US-China trade could hit growth further Impact on the level of GDP and trade by 2021-22 % difference from baseline Tariff increases introduced in May 0.0
USA GDP
China GDP
Tariffs extended to the rest of US-China trade World GDP
World trade
Higher uncertainty Trade excl. USA and China
-0.2 -0.4 -0.6 -0.8 -1.0 -1.2
-1.4 -1.6 -1.8 Note: The first scenario shows the impact of the United States raising tariffs on $200 billion of imports from China from 10% to 25% from mid-May 2019 (with reciprocal action by China on $60 billion of imports from the United States). The second 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 final scenario adds in the impact from a global rise of 50 basis points in investment risk premia that persists for three years before slowly fading thereafter. All tariff shocks are maintained for six years. Based on simulations on NiGEM in forward-looking mode. Source: OECD calculations.
14
China is key to a fragile economic growth Effect of weaker demand growth in China Export volumes 0
% difference from baseline, second year United Euro Commodity East States area Japan exporters Asia World
GDP at constant prices 0.0
% difference from baseline, second year United Euro Commodity East States area Japan exporters Asia World
-0.2 -1
-0.4 -0.6
-2
-0.8 -1.0
-3
-1.2 -1.4
-4
-1.6 -1.8
-5
-2.0
Note: Simulated impact of a two-year decline of 2 percentage points per annum in domestic demand growth in China, and a rise of 50 basis points in investment risk premia and decline of 10% in equity prices in all economies. The blue bars show the contribution from the direct slowdown in trade; the green bars show the additional contribution from adding higher uncertainty; the brown bars show the contribution from lower equity prices; and the orange bars show the additional effects if monetary policy is not able to act. Commodity exporting economies include Argentina, Brazil, Chile, Indonesia, Russia, South Africa and other non-OECD oil-producing economies. East Asia includes Korea and the Dynamic Asian Economies. Source: OECD calculations using NiGEM.
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The return of excess finance Leveraged loans outstanding
Investment-grade corporate bonds % share of bond issuance, by rating
USD trillion 2.5
Highly-leveraged loans in Europe Highly-leveraged loans in the United States Leveraged loans in Europe Leveraged loans in the United States
% 100
AA
A
BBB
80
2.0
60
1.5
1.0
40
0.5
20
0.0
AAA
1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
0 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
Note: LHS panel: The outstanding amount is calculated based on loan issuance but excludes the value of drawn and undrawn revolving credit facilities. A linear amortisation schedule is assumed for term loans and other amortising loans (i.e., mortgages, equipment, construction, . commercial loans). All other term loans are not amortised as they are repayable at maturity. To account for loan re-financing, a 40% early repayment ratio is assumed. Source: Patalano and Roulet (2019); and Çelik and Isaksson (2019).
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GOVERNMENTS MUST ACT URGENTLY TO REINVIGORATE GROWTH THAT BENEFITS ALL
Insufficient infrastructure is holding back private investment % of firms naming insufficient infrastructure as an obstacle to investment in Europe %
80
Digital infrastructure
Transport infrastructure
70
60 50 40 30 20 10 0
SVK LVA ITA DEU IRL AUT EU ESP BEL POL CZE FRA PRT GRC LTU GBR SWE LUX FIN SVN DNK NLD EST HUN 18
Source: European Investment Bank Investment Survey, 2018.
Better digital infrastructure is needed to boost competitiveness and bridge regional divides Share of households with internet broadband access % of total households Emerging-market economies
Advanced economies %
Minimum Capital Region
100
Flevoland
Country average Hamburg
Greater London
80
British Columbia
70
Overijssel
Lombardy
ĂŽle-deFrance
New Hampshire
80
Country average
Maximum
Federal City of Saint Petersburg Baja California Sur Istanbul
60
Tasmania
Brandenburg
Minimum 100
Madrid
North East England
%
Australian Capital Territory
Gangwon Region
90
Maximum
Quebec
Galicia
40 Calabria
60 50
Corsica Mississippi
20
Republic of Ingushetia Chiapas
0
. Note: Data for 2017 or latest available. Large regions follow the OECD Territorial level 2 (TL2) classification. Source: OECD Regional Statistics database.
Eastern Anatolia East
19
People need investments in skills to prepare for the future Share of workers in occupations at high risk of automation by income class % 45
Middle income
Lower income
Upper income
40 35 30 25 20 15 10 5 0
FIN KOR USA DNK NLD GBR EST CZE IRL AUT FRA DEU OECD ISR POL GRC ESP SVN SVK
Note: “Lower income” households defined as those with income below 75% of the national median. “Middle income” households are households with income between 75% and twice the national median. “Upper income” households are households with income over twice the national median. The risk of automation is calculated as the average of the risks of automation by occupation, weighted by the share of each occupation in the income class. Source: OECD calculations based on LIS and PIAAC.
20
Euro area: combine structural with fiscal action to improve growth and living standards Combined impact of structural reforms and a 3-year fiscal stimulus in countries with fiscal space Real GDP
Real wages per employee
Difference from baseline
Difference from baseline
Fiscal stimulus in countries with fiscal space Structural reforms only
% 0.9
% 0.9
0.8
0.8
0.7
0.7
0.6
0.6
0.5
0.5
0.4
0.4
0.3
0.3
0.2
0.2
0.1
0.1
0.0
0.0 2019
2020
2021
2022
Long-run
2019
2020
2021
2022
Note: The level of technical progress is gradually raised by 1% by the fifth year in all countries, and countries with fiscal space also increase government investment by 0.5% of GDP per annum for three years. Euro area monetary policy is assumed to be set in a way that takes into account the eventual long-run improvement in output. Countries with fiscal space here include Germany and the Netherlands. Source: OECD calculations.
Long-run
21
Some countries have fiscal space and insufficient investment Current account balance
Interest rate minus GDP growth (r-g) 2016-2018
% of GDP
2
12
1
10
0
8
-1
6
-2
4
-3
More fiscal space
2
-4
0
-5
-2
-6
-4
-7
-6
EST SWE LUX FIN KOR IRL LVA CAN CHE NLD DEU AUT GBR SVK JPN ESP BEL LTU PRT USA FRA GRC ITA SVN
2018
NLD CHE IRL DEU SVN LUX KOR JPN ITA AUT SWE EST LTU ESP PRT FRA LVA BEL FIN AUS USA SVK CAN GRC GBR
% pts
Note: r-g is the difference between the effective interest rate paid on net debt (r) and nominal GDP growth (g) for 2016-2018. r is the weighted difference between the implied interest rate paid on government financial liabilities and the implied interest rate earned on government financial assets, where the weights are the share of financial liabilities and assets in net debt, respectively. Source: OECD Economic Outlook database; and OECD calculations.
22
Key messages Global economic growth is stabilising at a low level • Trade growth has plunged and investment has slowed due to high uncertainty • Manufacturing is weak, but strong labour markets and services are supporting consumption • A slight pick-up by 2020 will not be enough to boost living standards
Key risks: Trade tensions, China slowdown, high debt • Further increases in trade restrictions would hurt investment, workers and consumers • A sharp slowdown in China would hit activity across the world • Private, often risky, debt is building up
Governments must act urgently to reinvigorate growth that benefits all • Invest in infrastructure, digital transformation and skills to meet tomorrow’s challenges • In the euro area, combine structural with fiscal policies to stimulate activity • Resolve trade disputes through increased international cooperation while fixing the international rules-based system 23
