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OECD: Trade tensions endanger investment and growth

posted onMay 21, 2019

Global growth slowed sharply in late 2018 and is now stabilising at a moderate level. Escalating trade conflicts and dangerous financial vulnerabilities threaten a new weakening of activity by undermining investment and confidence worldwide, according to the latest Economic Outlook by OECD, a twice-yearly analysis of the major economic trends and prospects. 

The global economy is expected to achieve moderate but fragile growth over the coming two years. Vulnerabilities stem from trade tensions, high policy uncertainty, risks in financial markets and a slowdown in China, all of which could further curb strong and sustainable medium-term growth worldwide.

The OECD projects that the global economy will grow by 3.2 per cent in 2019 and 3.4 per cent in 2020.  A year ago, it predicted 3.9% growth in 2019. 


(Graph Source: OECD)

The Outlook includes downward revisions for many major economies and warns that current growth rates are insufficient to bring about major improvements in employment or living standards.

The Outlook identifies continuing trade tensions as the principal factor weighing on the world economy. It notes that world trade – a key artery of the global economy – is projected to grow by just over 2% this year, which would be the lowest rate in a decade. It underlines that the current cycle of trade disputes is hurting manufacturing, disrupting global value chains and generating significant uncertainty that is weighing on investment decisions, and highlights the risk of further disruption.   


(Graph Source: OECD)

China remains key to global economic growth, according to the Outlook. Significant fiscal policy stimulus has buffered the economy as it re-balances from investment and export-led growth to a more domestic footing. A sharper slowdown than already seen in China would pose important risks to both global growth and trade prospects.

Angel Gurria
Angel Gurría, Secretary General of the OECD Photo: OECD

“The world economy is in a dangerous place. Unless there is a de-escalation of trade tensions, the outcome could be much worse than in our central scenario. Global trade growth has already fallen markedly, from 5.5% in 2017 to projected rates of 2.1% in 2019 and 3.1% in 2020. It should be growing at double the rate of GDP. The effect on investment is easy to understand. We invest to produce, ultimately to sell. If you don’t know if you have access to markets or at which tariff, you simply don’t invest” the secretary general of the OECD said in his opening remarks at the launch of the Economic Outlook during OECD’s Spring Forum in Paris.

“So all is not well. But let me assure you that we are not only drawing attention to how empty the glass is – we are also making recommendations on how to fill it” he continued.

The Outlook calls on governments to act now to ensure a stronger economic future. It calls for a return to international cooperation and multilateral dialogue to restore predictability in policy and relaunch trade. It renews calls for combining structural reforms in all euro area countries with additional public investment in low-debt European countries.

This should focus on digital, transport and energy networks as well as the education, training and competition reforms needed in the 21st Century economy, which would add momentum to a growth rebound, boost productivity and spur wage growth over the medium term, the Outlook said.

Worries about ongoing U.S.-China trade tensions continued to weigh on investor sentiment. Earlier this month US President Trump announced that he would increase tariffs on $200 billion in Chinese goods from 10% to 25%. Beijing responded by upping the tariffs on $60 billion of U.S. goods. 

Trump's administration last week also decided to ban China's telecom giant Huawei Technologies from buying U.S. technology without prior approval from the U.S. government. 

As Jack Schwager, one of the greatest finance traders says “actually, the best traders have no ego”. There is need for mutual understanding and cooperation, if we want to survive.