Presentation of the OECD Interim Economic Outlook

OECD INTERIM ECONOMIC OUTLOOK

Warning: low growth ahead 19 September 2019

Laurence Boone OECD Chief Economist http://www.oecd.org/economy/outlook/ ECOSCOPE blog: oecdecoscope.wordpress.com

Key messages

The global economic outlook continues to darken

Trade and political tensions fuel risks of persistent low growth Governments can reverse the spiralling costs of uncertainty and invest more 2

Global growth is weakening G20 Advanced

G20 Emerging

GDP projections, %, year-on-year

GDP projections, %, year-on-year

November 2018

May 2019

September 2019

November 2018

May 2019

September 2019

2.6

2.6

5.6

5.6

2.4

2.4

5.4

5.4

2.2

2.2

5.2

5.2

2.0

2.0

5.0

5.0

1.8

1.8

4.8

4.8

1.6

1.6

4.6

4.6

1.4

1.4

4.4

4.4

1.2

1.2

4.2

4.2

2017

2018

2019

2020

2017

2018

2019

2020

Note: G20 advanced economies are Australia, Canada, France, Germany, Italy, Japan, Korea, the United Kingdom and the United States.

G20 emerging economies are Argentina, Brazil, China, India, Indonesia, Mexico, Russia, Saudi Arabia, South Africa and Turkey.

Source: OECD Economic Outlook database; and OECD calculations.

3

GDP growth projections downgraded OECD Interim Economic Outlook projections %, year-on-year. Arrows indicate the direction of revisions since May 2019. downward by 0.6 pp and more

World Australia Canada Euro area Germany France Italy Japan Korea United Kingdom United States

downward by 0.3 to 0.6 pp

2018 3.6

2019 2.9

2020 3.0

2.7 1.9 1.9 1.5 1.7 0.7 0.8 2.7 1.4 2.9

1.7 1.5 1.1 0.5 1.3 0.0 1.0 2.1 1.0 2.4

2.0 1.6 1.0 0.6 1.2 0.4 0.6 2.3 0.9 2.0

downward by less than 0.3 pp

G20 Argentina Brazil China India1 Indonesia Mexico Russia Saudi Arabia South Africa Turkey

no revision

upward

2018 3.8

2019 3.1

2020 3.2

-2.5 1.1 6.6 6.8 5.2 2.0 2.3 2.2 0.8 2.8

-2.7 0.8 6.1 5.9 5.0 0.5 0.9 1.5 0.5 -0.3

-1.8 1.7 5.7 6.3 5.0 1.5 1.6 1.5 1.1 1.6

Note: Difference in percentage points based on rounded figures. The European Union is a full member of the G20, but the G20 aggregate only includes countries that are also members in their own right.

1. Fiscal years starting in April.

Source: OECD Economic Outlook database; and OECD calculations.

4

Trade growth is stalling as restrictions bite New trade restrictions in the G20

World trade growth

Trade coverage of measures introduced in each period

Goods and services, volumes

USD billion 500 450 400 350 300 250 200

10

%

Quarterly (a.r.)

Year-on-Year

8 6 4 2

150 100 50 0

0 -2 -4

2016

2017

2018

Note: Left: These figures are estimates and represent the trade coverage of the measures (i.e. annual imports of the products concerned in economies affected by the measures) introduced since the last date and not the cumulative impact of the trade measures.

Source: OECD Economic Outlook database; OECD-UNCTAD-WTO report on G20 trade and investment measures; and OECD calculations.

2019Q2

5

Uncertainty is dragging down manufacturing and investment Investment growth

Industrial production

G20 fixed investment World

Germany

United States

%, y-o-y

%, y-o-y

6

6 4

5

2

4

0

3

-2

2

-4

1

-6 2014

2015

2016

2017

2018

2019

0 2016

2017

2018

Note: Left: Industrial production aggregation uses PPP weights. Right: China and Saudi Arabia not included due to unavailability of quarterly data.

Source: OECD Economic Outlook database; US Federal Reserve; Eurostat; Ministry and Trade and Industry, Japan; KOSIS; and OECD calculations.

2019Q1

6

Job creation is slowing Employment growth %, y-o-y 2.1

2016-17

2018

2019H1

Hiring intentions United States

Germany

Euro area

2017

2018

Japan

Index, 3mma

58 1.8

57 56

1.5

55 1.2

54 53

0.9

52 0.6

51 50

0.3 0

49 Euro area

Japan

United States

48 2016

Note: Left: 2019H1 is annualised. Right: PMI for employment in manufacturing and services.

Source: OECD Economic Outlook database; Markit; and OECD calculations.

2019 7

TRADE AND POLITICAL TENSIONS FUEL RISKS OF PERSISTENT LOW GROWTH

8

Trade conflicts are entrenching uncertainty and risk long-lasting harm to investment Impact of 2019 US-China trade restrictions Difference from baseline after 2 to 3 years

Business investment

%

GDP

%

0.0

0.0

0.0

0.0

-0.5

-0.5

-0.2

-0.2

-1.0

-1.0

-0.4

-0.4

-1.5

-1.5

-0.6

-0.6

-2.0

-2.0

-0.8

-0.8

-2.5

-2.5

-1.0

-1.0

-3.0

-3.0

-1.2

-1.2

China

United States

Euro area

Japan

China

United States

World

Note: Total investment for China. The scenario shows the impact of: the United States raising tariffs on USD 200 billion of imports from China from 10% to 25% from mid-May 2019 (with reciprocal action by China on USD 60 billion of imports from the United States); the US further raising tariffs to 30% on USD 200 billion of imports to China in October and implementing tariffs of 15% on USD 110 billion and USD 160 billion of remaining imports from China in September and December 2019 respectively, with China assumed to react proportionately to these changes by raising tariffs on imports from the United States; and 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.

9

A no-deal Brexit would have large costs UK GDP

Euro area GDP

%, difference from baseline

%, difference from baseline

2020

2021

2022

2020

2021

2022

0.0

0.0

0.0

0.0

-0.5

-0.5

-0.2

-0.2

-1.0

-1.0

-0.4

-0.4

-1.5

-1.5

-0.6

-0.6

-2.0

-2.0

-0.8

-0.8

-2.5

-2.5

-1.0

-1.0

-3.0

Direct effects

Uncertainty

-3.0

-1.2

Direct effects

Uncertainty

Note: The direct effects include a decline in UK export volumes, declines in EU countries’ exports with the impact on individual countries dependent on the extent of their direct trade with the UK, a depreciation of the sterling upon exit, a decline in labour-augmenting technical progress due to lower trade openness and a decline in net inward migration. The uncertainty effect captures a rise in investment risk premia.

No monetary and fiscal policy response is assumed beyond already announced measures, which are incorporated in the baseline.

Source: OECD calculations, using the NiGEM global macroeconomic model.

-1.2

10

A no-deal Brexit would lead to sectoral disruptions in European economies Impact of a no-deal on production by sector, medium to long term %, difference from baseline

UK

-24

-20

-16

-12

-8

-4

EU27 Chemicals

Chemicals

Machinery & equipment

Machinery & equipment

Metals

Metals

Agri-food

Agri-food

Transport equipment

Transport equipment

Materials manufacturing

Materials manufacturing

Electronic equipment

Electronic equipment

0

Note: Production in volume.

Source: OECD calculations using the OECD METRO model.

-2.0 -1.6 -1.2 -0.8 -0.4 0.0 11

Investors hold massive amounts of risky debt Investment-grade corporate bonds

Corporate leveraged loans outstanding

% share of bond issuance, by rating

% 100

80

AAA

AA

A

USD billion

BBB

2.5

USD 499 bln

60

Highly-leveraged loans in Europe Highly-leveraged loans in the United States Leveraged loans in Europe Leveraged loans in the United States

2.0

1.5

40

1.0 USD 336 bln

20

0.5 USD 91 bln

0 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

0.0

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Note: Left: Only non-financial companies rated by S&P, Fitch and/or Moody’s. Right: The outstanding amount is calculated based on nonfinancial corporate 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).

12

The long-term decline in trend growth could persist OECD economies Trend GDP growth

%, y-o-y 4.0

Trend labour productivity growth

%, y-o-y 4.0

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 2018

1975

1980

1985

1990

1995

2000

2005

Note: Solid lines are linear projections. Trend GDP growth is the growth rate of potential output.

Source: OECD Economic Outlook database.

2010

2015

13

GOVERNMENTS CAN REVERSE THE SPIRALING COSTS OF UNCERTAINTY AND INVEST MORE

14

Monetary policy: little room for manoeuvre in advanced economies Yield curves on government bonds United States % 5

Sep-2019

Sep-2018

Japan

Euro area % 5

Sep-2019

Sep-2018

% 5

4

4

4

3

3

3

2

2

2

1

1

1

0

0

0

-1

-1

-1

0 3 6 9 12 15 18 21 24 27 30 maturity (years)

0 3 6 9 12 15 18 21 24 27 30

maturity (years)

Note: Yield curves on benchmark government bonds as of 16 September 2019.

Source: Refinitiv; and ECB.

Sep-2019

Sep-2018

0 3 6 9 12 15 18 21 24 27 30 maturity (years) 15

Fiscal and structural policies should accompany central bank efforts in the Euro area

QE

Real GDP, euro area

Asset prices after five years

%, difference from baseline

%, difference from baseline QE

With public investment and structural reforms

2.0

16

1.8

14

1.6

With public investment and structural reforms

12

1.4

10

1.2 1.0

8

0.8

6

0.6

4

0.4 0.2

2

0.0

0

Year 1

Year 2

Year 5

Long run

House prices

Equity prices

Note: The QE scenario is calibrated to the measures introduced by the ECB in 2015. The scenario with public investment and structural reforms includes a rise in public investment by ž percent of GDP for five years, productivity-enhancing structural reforms that rise total factor productivity growth by 0.2 percentage points each year for five years, and a fifty percent smaller QE programme.

Source: OECD calculations, using the NiGEM global macroeconomic model.

16

Restoring business confidence would revive investment Index, 3mma

Economic policy uncertainty index (lhs)

Business confidence (rhs)

Index

350

102.0

300

101.5

250

101.0

200

100.5

150

100.0

100

99.5

50

99.0

0

98.5 2011

2012

2013

2014

Note: The last data point is August 2019. Both series are global.

Source: policyuncertainty.org; Markit; and OECD calculations.

2015

2016

2017

2018

2019

17

Meeting infrastructure investment needs would help escape the risk of persistent low growth Infrastructure investment needs Global annual average spending needs by 2030 Road Primary energy supply Water and sanitation Power and electricity Telecoms Energy demand/efficiency Rail

Airports and ports 0.0

0.5

1.0

1.5 2.0 2.5 Trillion USD, 2015 prices

Note: The scenario does not include the additional investments needed to meet carbon emissions targets.

Source: OECD Technical note on estimates of infrastructure investment needs, 2017.

18

Key messages The global outlook continues to darken • Growth continues to slow in advanced and emerging economies • Investment is taking a hit as high policy uncertainty feeds a collapse in trade growth and a manufacturing slump • Consumption is holding up but is threatened by slowing job growth

Trade and political tensions fuel risks of persistent low growth • Escalating trade restrictions are entrenching uncertainty, endangering future growth • A no-deal Brexit would hurt an already weak UK economy and create disruptions across Europe • High private debt of deteriorating quality could amplify the effects of shocks

Governments can reverse the spiraling costs of uncertainty and invest more • Halt the surge in trade-distorting tariffs and subsidies and restore predictable rules for business • Limit the reliance on overstretched monetary policy, think fiscal and structural • Escape the trap of persistent weak growth: undertake public investment 19