OECD INTERIM

ECONOMIC OUTLOOK

Warning: low growth ahead

19 September 2019

Laurence Boone
OECD Chief Economist
http://www.oecd.org/economy/outlook/
ECOSCOPE blog: oecdecoscope.wordpress.com
 Key messages

The global economic outlook continues to darken

Trade and political tensions fuel risks of persistent

low growth

Governments can reverse the spiralling costs of

uncertainty and invest more

2
 Global growth is weakening

G20 Advanced G20 Emerging

GDP projections, %, year-on-year GDP projections, %, year-on-year
November 2018 May 2019 September 2019 November 2018 May 2019 September 2019
2.6 2.6 5.6 5.6

2.4 2.4 5.4 5.4

2.2 2.2 5.2 5.2

2.0 2.0 5.0 5.0

1.8 1.8 4.8 4.8

1.6 1.6 4.6 4.6

1.4 1.4 4.4 4.4

1.2 1.2 4.2 4.2

2017 2018 2019 2020 2017 2018 2019 2020

Note: G20 advanced economies are Australia, Canada, France, Germany, Italy, Japan, Korea, the United Kingdom and the United States.
G20 emerging economies are Argentina, Brazil, China, India, Indonesia, Mexico, Russia, Saudi Arabia, South Africa and Turkey. 3
Source: OECD Economic Outlook database; and OECD calculations.
 GDP growth projections downgraded

OECD Interim Economic Outlook projections

%, year-on-year. Arrows indicate the direction of revisions since May 2019.
downward by 0.6 pp and more downward by 0.3 to 0.6 pp downward by less than 0.3 pp no revision upward

2018 2019 2020 2018 2019 2020

World 3.6 2.9 3.0 G20 3.8 3.1 3.2

Australia 2.7 1.7 2.0 Argentina -2.5 -2.7 -1.8

Canada 1.9 1.5 1.6 Brazil 1.1 0.8 1.7
Euro area 1.9 1.1 1.0 China 6.6 6.1 5.7
Germany 1.5 0.5 0.6 India1 6.8 5.9 6.3
France 1.7 1.3 1.2 Indonesia 5.2 5.0 5.0
Italy 0.7 0.0 0.4 Mexico 2.0 0.5 1.5
Japan 0.8 1.0 0.6 Russia 2.3 0.9 1.6
Korea 2.7 2.1 2.3 Saudi Arabia 2.2 1.5 1.5
United Kingdom 1.4 1.0 0.9 South Africa 0.8 0.5 1.1
United States 2.9 2.4 2.0 Turkey 2.8 -0.3 1.6

Note: Difference in percentage points based on rounded figures. The European Union is a full member of the G20, but the G20 aggregate
only includes countries that are also members in their own right.
1. Fiscal years starting in April. 4
Source: OECD Economic Outlook database; and OECD calculations.
 Trade growth is stalling
as restrictions bite
New trade restrictions in the G20 World trade growth
Trade coverage of measures introduced in each period Goods and services, volumes

USD billion % Quarterly (a.r.) Year-on-Year

500 10

450
8
400
350 6
300
4
250
200 2
150
100 0

50
-2
0
-4
2016 2017 2018 2019Q2
Note: Left: These figures are estimates and represent the trade coverage of the measures (i.e. annual imports of the products concerned in
economies affected by the measures) introduced since the last date and not the cumulative impact of the trade measures.
Source: OECD Economic Outlook database; OECD-UNCTAD-WTO report on G20 trade and investment measures; and OECD calculations. 5
 Uncertainty is dragging down
manufacturing and investment
Industrial production Investment growth
G20 fixed investment
World Germany United States
%, y-o-y
%, y-o-y
6
6

4 5

2 4

0 3

-2
2

-4
1
-6
2014 2015 2016 2017 2018 2019 0
2016 2017 2018 2019Q1

Note: Left: Industrial production aggregation uses PPP weights. Right: China and Saudi Arabia not included due to unavailability of quarterly
data.
Source: OECD Economic Outlook database; US Federal Reserve; Eurostat; Ministry and Trade and Industry, Japan; KOSIS; and OECD 6
calculations.
 Job creation is slowing

Employment growth Hiring intentions

%, y-o-y United States Germany Euro area Japan
2016-17 2018 2019H1
2.1 Index, 3mma
58
1.8 57
56
1.5
55
1.2 54
53
0.9
52
0.6 51
50
0.3
49
0 48
Euro area Japan United States 2016 2017 2018 2019

Note: Left: 2019H1 is annualised. Right: PMI for employment in manufacturing and services. 7
Source: OECD Economic Outlook database; Markit; and OECD calculations.
TRADE AND POLITICAL TENSIONS
FUEL RISKS OF
PERSISTENT LOW GROWTH

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 Trade conflicts are entrenching uncertainty
and risk long-lasting harm to investment
Impact of 2019 US-China trade restrictions
Difference from baseline after 2 to 3 years

Business investment GDP

% %
0.0 0.0 0.0 0.0

-0.5 -0.5 -0.2 -0.2

-1.0 -1.0 -0.4 -0.4

-1.5 -1.5 -0.6 -0.6

-2.0 -2.0 -0.8 -0.8

-2.5 -2.5 -1.0 -1.0

-3.0 -3.0 -1.2 -1.2

China United Euro area Japan China United States World
States
Note: Total investment for China. The scenario shows the impact of: the United States raising tariffs on USD 200 billion of imports from China from 10%
to 25% from mid-May 2019 (with reciprocal action by China on USD 60 billion of imports from the United States); the US further raising tariffs to 30% on
USD 200 billion of imports to China in October and implementing tariffs of 15% on USD 110 billion and USD 160 billion of remaining imports from China
in September and December 2019 respectively, with China assumed to react proportionately to these changes by raising tariffs on imports from the
United States; and a global rise of 50 basis points in investment risk premia that persists for three years before slowly fading thereafter. All tariff
shocks are maintained for six years. Based on simulations on NiGEM in forward-looking mode. 9
Source: OECD calculations.
 A no-deal Brexit would have large costs

UK GDP Euro area GDP

%, difference from baseline %, difference from baseline
2020 2021 2022 2020 2021 2022
0.0 0.0 0.0 0.0

-0.5 -0.5 -0.2 -0.2

-1.0 -1.0 -0.4 -0.4

-1.5 -1.5 -0.6 -0.6

-2.0 -2.0 -0.8 -0.8

-2.5 -2.5 -1.0 -1.0

Direct effects Uncertainty Direct effects Uncertainty
-3.0 -3.0 -1.2 -1.2

Note: The direct effects include a decline in UK export volumes, declines in EU countries’ exports with the impact on individual countries
dependent on the extent of their direct trade with the UK, a depreciation of the sterling upon exit, a decline in labour-augmenting technical
progress due to lower trade openness and a decline in net inward migration. The uncertainty effect captures a rise in investment risk premia.
No monetary and fiscal policy response is assumed beyond already announced measures, which are incorporated in the baseline. 10
Source: OECD calculations, using the NiGEM global macroeconomic model.
 A no-deal Brexit would lead to sectoral
disruptions in European economies
Impact of a no-deal on production by sector, medium to long term
%, difference from baseline

UK EU27

Chemicals Chemicals

Machinery & equipment Machinery & equipment

Metals Metals

Agri-food Agri-food

Transport equipment Transport equipment

Materials manufacturing Materials manufacturing

Electronic equipment Electronic equipment

-24 -20 -16 -12 -8 -4 0 -2.0 -1.6 -1.2 -0.8 -0.4 0.0

Note: Production in volume. 11

Source: OECD calculations using the OECD METRO model.
 Investors hold massive amounts of risky debt
Investment-grade corporate bonds Corporate leveraged loans outstanding
% share of bond issuance, by rating
% AAA AA A BBB USD billion Highly-leveraged loans in Europe
100 Highly-leveraged loans in the United States
2.5 Leveraged loans in Europe
Leveraged loans in the United States
80
USD 2.0
499 bln

60
1.5

40 1.0
USD
336 bln
20 0.5

USD
91 bln
0 0.0
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Note: Left: Only non-financial companies rated by S&P, Fitch and/or Moody’s. Right: The outstanding amount is calculated based on non-
financial corporate loan issuance but excludes the value of drawn and undrawn revolving credit facilities. A linear amortisation schedule is
assumed
. for term loans and other amortising loans (i.e., mortgages, equipment, construction, commercial loans). All other term loans are not
amortised as they are repayable at maturity. To account for loan re-financing, a 40% early repayment ratio is assumed. 12
Source: Patalano and Roulet (2019); and Çelik and Isaksson (2019).
 The long-term decline in trend growth
could persist

OECD economies
Trend GDP growth Trend labour productivity growth
%, y-o-y %, y-o-y
4.0 4.0

3.5 3.5

3.0 3.0

2.5 2.5

2.0 2.0

1.5 1.5

1.0 1.0

0.5 0.5

0.0 0.0
1975 1980 1985 1990 1995 2000 2005 2010 2015 2018

Note: Solid lines are linear projections. Trend GDP growth is the growth rate of potential output. 13
Source: OECD Economic Outlook database.
 GOVERNMENTS CAN
REVERSE THE SPIRALING
COSTS OF UNCERTAINTY
AND INVEST MORE

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 Monetary policy: little room for manoeuvre
in advanced economies
Yield curves on government bonds
United States Euro area Japan
% % %
5 5 5
Sep-2019 Sep-2018 Sep-2019 Sep-2018 Sep-2019 Sep-2018

4 4 4

3 3 3

2 2 2

1 1 1

0 0 0

-1 -1 -1
0 3 6 9 12 15 18 21 24 27 30 0 3 6 9 12 15 18 21 24 27 30 0 3 6 9 12 15 18 21 24 27 30
maturity (years) maturity (years) maturity (years)
Note: Yield curves on benchmark government bonds as of 16 September 2019. 15
Source: Refinitiv; and ECB.
 Fiscal and structural policies should accompany
central bank efforts in the Euro area
Real GDP, euro area Asset prices after five years
%, difference from baseline %, difference from baseline

QE With public investment and structural reforms QE With public investment and structural reforms
2.0 16

1.8 14
1.6
12
1.4
10
1.2
1.0 8
0.8 6
0.6
4
0.4
0.2 2

0.0 0
Year 1 Year 2 Year 5 Long run House prices Equity prices
Note: The QE scenario is calibrated to the measures introduced by the ECB in 2015. The scenario with public investment and structural
reforms includes a rise in public investment by ¾ percent of GDP for five years, productivity-enhancing structural reforms that rise total factor
productivity growth by 0.2 percentage points each year for five years, and a fifty percent smaller QE programme. 16
Source: OECD calculations, using the NiGEM global macroeconomic model.
 Restoring business confidence
would revive investment

Index, 3mma Economic policy uncertainty index (lhs) Business confidence (rhs)
Index
350 102.0

300 101.5

250 101.0

200 100.5

150 100.0

100 99.5

50 99.0

0 98.5
2011 2012 2013 2014 2015 2016 2017 2018 2019

Note: The last data point is August 2019. Both series are global. 17
Source: policyuncertainty.org; Markit; and OECD calculations.
 Meeting infrastructure investment needs would
help escape the risk of persistent low growth
Infrastructure investment needs
Global annual average spending needs by 2030

Road

Primary energy supply

Water and sanitation

Power and electricity

Telecoms

Energy demand/efficiency

Rail

Airports and ports

0.0 0.5 1.0 1.5 2.0 2.5

Trillion USD, 2015 prices
Note: The scenario does not include the additional investments needed to meet carbon emissions targets. 18
Source: OECD Technical note on estimates of infrastructure investment needs, 2017.
 Key messages

The global outlook continues to darken

• Growth continues to slow in advanced and emerging economies
• Investment is taking a hit as high policy uncertainty feeds a collapse in trade growth and a
manufacturing slump
• Consumption is holding up but is threatened by slowing job growth

Trade and political tensions fuel risks of persistent low growth

• Escalating trade restrictions are entrenching uncertainty, endangering future growth
• A no-deal Brexit would hurt an already weak UK economy and create disruptions across
Europe
• High private debt of deteriorating quality could amplify the effects of shocks
Governments can reverse the spiraling costs of uncertainty and invest more
• Halt the surge in trade-distorting tariffs and subsidies and restore predictable rules for
business
• Limit the reliance on overstretched monetary policy, think fiscal and structural
• Escape the trap of persistent weak growth: undertake public investment

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