The Organization for Economic Cooperation and Development downgraded global and regional growth forecasts for this year and 2017, warning that a low-growth trap has taken root.
In its latest Interim Economic Outlook, the OECD updated its growth forecasts from its June expectations. Global growth is expected to slow to 2.9% in 2016, down from 3% forecast in June; while 2017 growth was downgraded to 3.2% from 3.3%.
The U.K.'s decision to leave the European Union will weigh on its growth prospects for 2017, with the OECD downgrading the U.K.'s gross domestic product forecast by a full percentage point, to 1%. For 2016, however, U.K. growth was upgraded vs. figures in June, to 1.8% from 1.7%. In its outlook, the OECD said 2016 GDP growth has been supported by strong performance prior to the referendum, which took place June 23, despite a contraction in business investment. “Developments to date are broadly consistent with the more moderate scenarios set out prior to the referendum and reflect prompt action by the Bank of England in August,” which cut interest rates by 25 basis points to 0.25%, and expanded its quantitative easing policy.
However, for 2017 the OECD's GDP growth forecast for the U.K. is “well below the pace in recent years and forecasts prior to the referendum. Uncertainty about the future path of policy and the reaction of the economy remains very high, and risks remain to the downside.” Arrangements for future trading with the EU and other trade partners will be “critical” to the U.K.'s economic prospects.
The OECD's eurozone forecast dropped to 1.5% for 2016, from 1.6% in June; and to 1.4% for 2017, down from 1.7% in June. Regarding Brexit, the OECD added that “more negative effects on the euro area are likely to become apparent in 2017.”
U.S. GDP growth was downgraded to 1.4% from 1.8% for 2016, and to 2.1% from 2.2% for 2017. The OECD said in its update that 2016 growth has slowed “despite solid consumption and job growth, due to weak investment, partly reflecting developments in the energy sector, and a prolonged inventory correction. U.S. demand growth is likely to improve into 2017, but remain below historical standards.”
The OECD also highlighted in its outlook the need for further fiscal loosening. “All countries have room to restructure their spending and tax policies towards a more growth friendly mix by increasing hard and soft infrastructure spending, and using fiscal measures to support structural reforms. … Supportive macroeconomic policies would create a more favorable environment for the short-term effects of structural reforms in the current weak demand environment,” the outlook said.