In an interim report outlining its economic outlook, the OECD has lowered its growth forecasts for 2016 and 2017 for the second time in three months.
The institute foresees a near-stagnation of the global economy. Leading indicators point to a weakening of growth in some of the largest economies.
Overall, the institute forecasts a real GDP of 3% for 2016 and 3.3% for 2017.
This represents a decrease of 0.3 percentage points over the two years.
According to the OECD, the United States might experience growth of 2% and 2.2%, the Eurozone 1.4% and 1.7%, China 6.5% and 6.2%, while Japan is expected to stagnate with rates of 0.8% and 0.6%. Germany will see growth of 1.3% and 1.7%, while France will remain at around 1.2% and 1.5% growth.
The organization calls for a unified response to stimulate growth and demand because, according to it, all possible means must be implemented to restart the engine.
Even the United States is urging the 20 largest industrialized and emerging countries to present a united front to stimulate the economy: governments should use all monetary and fiscal policy tools to boost global demand.
But the devil lies in the details. An appropriate strategy must be based on three pillars: fiscal policy, monetary policy, and structural reforms.
In the field of fiscal policy, allowing deficits to reach previously unattained amounts has not improved the situation. Japan has a public debt of 240% of GDP. The United States will likely have a public debt of $25 trillion by 2025… and will no longer be able to repay it.
In the Eurozone, the Maastricht stability criteria impose a public debt ceiling of 60% of GDP on member states, which no one respects anymore, not even Germany. Financing new investments through credit seems like a wonderful idea, but it’s nothing more than increasing public debt and thus… leading to the next crisis.
Concerning monetary policy, central banks have used all their ammunition. Money market interest rates are near 0% or even below; bond yields in highly rated countries are negative, even in the long term.
Normalization of the interest rate structure seems impossible in the medium term — and this is true even in the United States, which has nevertheless made it its goal.
Most economists think it’s too risky to continue pushing interest rates into negative territory because it forces savers and investors towards ever-riskier assets… precisely what led, in 2008, to the largest economic crisis in the world since 1929.
Even the liquidity left in bank accounts is likely to incur higher costs. It’s impossible to predict the behavior of private households when they try to avoid negative rates: they might well convert all their assets into cash… but only physical gold costs nothing in interest.
The severe tensions in the global economy are further exacerbated by the race to devaluation and the underlying currency wars. Since the beginning of 2015, 21 central banks around the world have lowered their benchmark interest rates.
The frictions and tensions caused by the imbalances of the global economy are giving rise to protectionist trends, which hinder the economy. Everyone is trying to gain a trade advantage by devaluing their currency.
Conclusion
Stronger economic growth cannot be achieved either through another monetary easing by central banks or by increasing the already absurdly high public debt. The marginal utility of these two policies has long been reached, and each new step becomes counterproductive and appears as a desperate act.
In national parliaments as well as in international conferences, structural reforms are extremely difficult to implement.
The global economy risks finding itself in a “Japanese” situation. Increasing protectionism accelerates the race to devaluation in the currency markets.
