The world economy is likely to expand no faster this year than in 2015, the Organisation for Economic Cooperation and Development (OECD) said in it interim economic outlook, adding that advanced economies and emerging markets will reflect modest recovery and slower activity respectively.
It said sluggish demand was leading to lower inflation and inadequate wage and employment growth.
The OECD projects that the global economy will grow by 3 percent this year and 3.3 percent in 2017, which is well below long-run averages of around 3¾ percent. This is also lower than would be expected during a recovery phase for advanced economies, and given the pace of growth that could be achieved by emerging economies in convergence mode.
“The downgrade in the global outlook since the previous Economic Outlook in November 2015 is broadly based, spread across both advanced and major emerging economies, with the largest impacts expected in the United States, the euro area and economies reliant on commodity exports, like Brazil and Canada,” the report said.
It said financial instability risks are substantial, as demonstrated by recent falls in equity and bond prices worldwide, and increasing vulnerability of some emerging economies to volatile capital flows and the effects of high domestic debt.
“Global growth prospects have practically flat-lined, recent data have disappointed and indicators point to slower growth in major economies, despite the boost from low oil prices and low interest rates,” said OECD Chief Economist Catherine L. Mann.
“Given the significant downside risks posed by financial sector volatility and emerging market debt, a stronger collective policy approach is urgently needed, focusing on a greater use of fiscal and pro-growth structural policies, to strengthen growth and reduce financial risks,” she said.
The Interim Economic Outlook calls for a stronger policy response, changing the policy mix to confront the current weak growth more effectively. It points out that sole reliance on monetary policy has proven insufficient to boost demand and produce satisfactory growth, while fiscal policy is contractionary in several major economies and structural reform momentum has slowed.
The OECD says monetary policies should remain highly accommodative in advanced economies, until inflation has shown clear signs of moving durably towards official targets. In emerging market economies, monetary support should be provided where possible, taking into account inflation developments and capital market responses.
The Outlook suggests that a stronger fiscal policy response, combined with renewed structural reforms, is needed to support growth and provide a more favourable environment for productivity-enhancing innovation and change, particularly in Europe.
“With governments in many countries currently able to borrow for long periods at very low interest rates, there is room for fiscal expansion to strengthen demand in a manner consistent with fiscal sustainability,” Ms Mann said. “The focus should be on policies with strong short-run benefits and that also contribute to long-term growth. A commitment to raising public investment would boost demand and help support future growth,” Mann said.