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Raise investment to maintain global growth, says OECD

Raise investment to maintain global growth, says OECD

Strongest upturn this decade expected to fade in 2019, Economic Outlook warns

Business investment rates in most large economies remain too low to keep the global economy powering forward for long, the Organisation for Economic Cooperation and Development warned on Tuesday.

In its latest Economic Outlook, the club of mostly rich nations said the momentum and high global growth rates would continue next year but fade in 2019 unless investment improved.

Catherine Mann, chief economist, said: “Policy is currently stimulative but in the absence of structural reforms we won’t get the private sector investment to get the productivity improvements we need.”

The organisation, which is tasked with improving economic performance, said the upturn is largely cyclical and has been spurred on by central banks’ efforts to lower the cost of borrowing and governments’ easing back on austerity.

This combination, Ms Mann said, had led to the strongest synchronised upturn since 2010, with all the 35 advanced economy countries that belong to the OECD growing and most of them enjoying an accelerating expansion.

“Countries should use this period of growth for policies to ensure the dynamism continues when fiscal and monetary policy stimulus is no longer active,” she said. The OECD forecasts that the global economy will expand 3.6 per cent this year, rising to 3.7 per cent in 2018, just below the 2005-2014 average, but will ease back to 3.6 per cent in 2019.

This “hump shape” of projected growth rates is expected to occur throughout the largest economies — China, the eurozone, the US and Japan — because business investment has only just climbed back to normal levels, when it would traditionally be far above average levels at similar points in previous cycles.

It is unusual for business investment growth to remain muted when economies are surging forward, since this is normally the time when business leaders invest in additional capacity to meet demand for additional goods and services. “We’re struggling with the question of why [business investment has been so weak],”

Ms Mann said, adding that there was not a simple recipe for each country to follow and that the reforms needed differed from country to country. In the US, the OECD supports corporate tax reform to bring the American system and those of other advanced countries more into line.

But the organisation expresses more scepticism towards the specifics of the White House-backed legislation working its way through Congress. Ms Mann suggested it “does not really address some of the important issues of how tax is related to productivity”.

For the eurozone, she urged national leaders not to be complacent now that the single currency area was enjoying strong growth rates. There was still more work to do in fostering competition in services and resolving the problems of non-performing loans, particularly in southern Europe.

Brexit uncertainties should encourage the UK authorities to bring forward government investment even more than they are already doing, Ms Mann said, since the UK was projected to be slowing just as most other OECD economies were accelerating. The UK growth forecast was revised from 1 per cent next year to 1.2 per cent because there is a greater chance of agreement between Britain and the EU to have a transition period immediately after Brexit.

The OECD says there is no reason that most advanced economies cannot return to the growth rates of the past, since there are ample untapped labour resources among women and older workers. Returning investment to levels of previous upswings would rekindle productivity growth and raise living standards.

 

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