OECD calls on governments to boost economy by loosening purse strings

OECD calls on governments to boost economy by loosening purse strings

European governments that can afford to increase public spending should loosen their purse strings to stop the economic slowdown from turning into long-term stagnation, the OECD has said.

                Global growth remains heavily dependent on the “unprecedented” monetary support put in place by central banks since the global crisis, the club for rich nations warned in a new report published on Tuesday. It called for governments to “reignite” multilateral trade talks and step up fiscal stimulus where they had room to do so.

“The world is fragile,” said Laurence Boone, the OECD’s chief economist.

Global growth has weakened markedly in the last year, and the eurozone has been especially hard hit by the sharp trade slowdown and uncertainty over trade policy, which is holding back business investment.

This lower growth could become entrenched unless European governments with fiscal space — notably Germany and the Netherlands — take action to raise public investment, the Paris-based organisation said.

Most OECD countries are already relaxing fiscal policy this year, but for some there is scope to go further given their low cost of borrowing, the OECD said.

A three-year increase in government investment of 0.5 per cent of GDP per annum in Germany and the Netherlands, combined with structural reforms in all eurozone economies, could add 1 per cent to the bloc’s long-run level of GDP, the OECD calculated. Sweden and Switzerland also have scope to loosen fiscal policy without boosting the level of government debt as a proportion of GDP, the OECD said.

Countries such as Spain and the UK might be able to lower their budget balances without increasing debt, but in others — including France and Italy — further fiscal stimulus would risk undermining future debt sustainability, the OECD concluded.

Trade tensions have already hit global growth and the latest flare-up between the US and China will worsen an already mediocre outlook for the world economy, the OECD said, cutting its growth forecast over the next two years. It predicts output will expand by 3.2 per cent in 2019 and 3.4 per cent in 2020 — well below the growth rates seen in 2017-18, and the average over the past three decades.

Tariffs imposed by the US and China last year have already started to slow growth and add to inflation, the OECD said, and the measures announced this month — which are not included in its projections — could double their effects.

A further escalation, with the US and China imposing 25 per cent tariffs on all bilateral trade from July, could cut 0.6 per cent from US output and 0.8 per cent from Chinese output by 2021, according to the OECD. More damaging still would be the stifling effect of uncertainty on business investment: it estimates this could cut 0.7 per cent from global output by 2021.

Despite central banks’ stimulus efforts “it is very difficult to be resilient to what has been happening on the trade side”, Ms Boone said.

The apparent improvement in the US, eurozone and Chinese economies in the first quarter of 2019 — largely due to resilience in the services sector — provides little reassurance about the longer-term outlook, she said.

Much of the recent pick-up is likely to be due to companies stockpiling and services will eventually be affected if the slump in manufacturing continues, she argued.