Higher US Rates Could Unleash Damaging Volatility: OECD

Mar 09, 2017, 00:34
Higher US Rates Could Unleash Damaging Volatility: OECD

Global economic growth is set to gain momentum modestly this year and next, underpinned by fiscal stimulus in the major economies, though the threat of risks such as financial vulnerabilities and political uncertainty derailing the recovery remains, the Organization for Economic Cooperation and Development said on Tuesday. This improvement largely reflects the combined effects of fiscal and structural initiatives in major economies, notably China, Canada and the United States, together with a more expansionary stance in the euro area, the OECD said. Thus, the global growth rate is seen recovering from 3 percent in 2016.

"A rollback of existing trade openness would be costly, with a significant share of jobs in many countries linked to participation in global value chains", it said.

The OECD also raised its estimates for several of the world's biggest economies, including the United States and China, but kept its world economic estimate unchanged at 3.3 per cent - just slightly better than last year's weak 3.0 per cent.

The OECD on Tuesday increased its United Kingdom growth forecast for 2017 to 1.6%, up from a previous estimate of 1.2%, presented in November past year.

"Disconnect between financial markets and fundamentals, potential market volatility, financial vulnerabilities and policy uncertainties could, however, derail the modest recovery", the OECD said in its report. In addition, the rapid growth of private sector credit and the relatively high-level of indebtedness is a key risk in a number of emerging markets, above all in China, and housing valuations are a matter of concern in some advanced economies.

Next year, the US economy is projected to grow by 2.8 per cent and Canada's is expected to expand by 2.2 per cent, ahead of the other G7 countries.

In Japan, fiscal easing was seen underpinning growth of 1.2 per cent though the rate was seen falling back to 0.8 per cent in 2018.

The think-tank said Canada's economy will be supported this year by export growth, a better market for commodities and government spending initiatives.

In Europe, GDP for the 19 countries that use the euro currency is forecast to expand at an annual rate of 1.6% in 2017 and 2018, down from 1.7% in 2016. "While the modest pick-up is welcome, it would still leave global GDP growth below the historical average of around 4% in the two decades prior to the crisis", the OECD said.

China is projected to record a further slowing economy to 6.5 percent this year and 6.3 percent in 2018 as it "makes a necessary transition away from a reliance on external demand and heavy industry toward domestic consumption and services".

Two other major emerging economies - Russian Federation and Brazil - are both recovering from deep recessions with the help of higher commodity prices and easing inflation.