The Organisation for Economic Co-operation and Development (OECD) has cut its global growth forecasts for this year and next as emerging market economies, including India and Brazil, cool.
The world economy will probably expand 2.7 percent this year and 3.6 percent next year, instead of the 3.6 percent and 5.8 percent predicted in May, the Paris-based OECD said in a semi-annual report yesterday.
“Most of the emerging economies have underlying fragilities that mean they cannot continue growing as they used to,” OECD chief economist Pier Carlo Padoan said. “They used to be an important support engine for global growth in bad times. Now the reverse is true and advanced economies can’t be said to be in very good times again.”
The reduced growth prospects underline how the global economy remains vulnerable five years after the collapse of Lehman Brothers. While the euro zone had exited a recession, the OECD said the European Central Bank (ECB) should look at ways to ease policy further and the US Federal Reserve should keep an accommodative stance for some time before it began tapering its stimulus.
“The Fed is in a very tricky position,” Padoan said. “Many people were surprised by the huge reaction when discussion about tapering was introduced. The Fed has to re-assess market reactions and this makes deciding when to taper more difficult. But it will have to happen eventually.”
In the report, the OECD sees India’s economy expanding 3.4 percent this year and 5.1 percent next year, down from 5.7 percent and 6.6 percent previously. It cut its forecast for Brazil to 2.5 percent and 2.2 percent from 2.9 percent and 3.5 percent.
Growth in the US will be 1.7 percent and 2.9 percent this year and next, similar to the outlook in May, while Japan’s gross domestic product (GDP) will expand 1.8 percent and 1.5 percent. On Japan, the OECD said that with government debt more than 230 percent of GDP, a “credible fiscal consolidation plan” to achieve a surplus in 2020 “is a top priority”.
The OECD sees a 0.4 percent contraction in the euro zone, less than the 0.6 percent previously forecast, and expansion of 1 percent next year.
The OECD gave 2015 forecasts for the first time. The world economy would expand 3.9 percent that year, with the US growing 3.4 percent, the euro zone 1.6 percent and Japan 1 percent. China would grow 7.5 percent.
The ECB delivered a surprise rate cut on November 7, reducing its main re-financing rate to 0.25 percent after euro zone inflation slowed to 0.7 percent, less than half the central bank’s target level. The OECD said the ECB should look at non-standard monetary measures to further bolster an economy suffering from record-high unemployment, bank de-leveraging and tight credit conditions.
The euro zone’s nascent recovery lost momentum in the third quarter as German growth slowed and France’s economy unexpectedly contracted.
China is faring best as it adjusts policy to confront a changing global outlook. Chinese GDP would rise 7.7 percent this year and 8.2 percent next year as a “small fiscal stimulus” revived domestic demand, the OECD said. – Bloomberg