Analytics, EU – Baltic States, Forum, Modern EU

The MCM discussed the need for inclusive growth to improve well-being for all in open, digitally advanced economies and work to define a more people-centered approach to international regulations. It highlighted the importance of continuing countries’ focus on developing more integrated, and inclusive economies and societies. This MCM echoes the pledge of the UN-2030 Agenda for Sustainable Development to “Leave No One Behind”.

Making globalisation work for better lives for all was the main message at the OECD forum.

Bridging divides

The central focus of the forum will be on “bridging divides” apparent presently. Divides have become apparent globally and regionally on a number of fronts; among main divides are: increasing populism and nationalism, historically low levels of trust, rapid pace of technological development, and continued effects of the crisis. These and some other “divides” are having a disruptive impact on societies and countries’ economies.

                                                            
Ministers were discussing, notably: global general economic outlook, the opportunities and challenges of economic integration, the challenges of globalisation; domestic policies to ensure people, firms, regions and cities can thrive in an open and digitalised environment; building inclusive globalisation; as well as international trade and investment for the benefit of all.

http://www.oecd.org/general/oecd-week.htm

Economic outlook

Global economic growth is expected to pick up modestly in 2018 to around 3.6 % from a projected 3.3% in 2017 but risks of rising protectionism, financial vulnerabilities, potential volatility from divergent interest rate paths and disconnects between market valuations and real activity have been underlined in the OECD’s 2017 outlook. 

Table: GDP in major global economies

The projected improvement largely reflects continuing and expected combined fiscal and structural initiatives in the major economies - notably China, Canada and the United States - together with a slightly more expansionary stance in the euro area, which could be more ambitious. Such policies are needed to catalyse private demand to boost global activity and reduce inequalities. 

Global economic outlook

The global economy portrayed by the Interim Economic Outlook remains beset by sub-par GDP growth and high inequality, calling for policy responses that advance inclusive growth in the context of increased economic integration.

Commenting on the Outlook, OECD Secretary-General Angel Gurría said: “Growth is still too weak and its benefits too narrowly focused to make a real difference to those who have been hit hard by the crisis and who are being left behind. Now, more than ever, governments need to take actions that restore people’s confidence while at the same time resisting turning inwards or rolling back many of the advances that have been achieved through greater international co-operation.”

The OECD’s Interim Economic Outlook examines some of the many risks that could derail the projected modest upturn in global growth.

Foremost among these there is the risk of rising protectionism that would hurt global growth and impact the large number of jobs that depends on trade. The rapid growth of private sector credit and the relatively high level of indebtedness is a key risk in a number of emerging markets, above all in China, and housing valuations are a matter of concern in some advanced economies.

 The strength of financial market valuations appears disconnected to the outlook for the real economy, where the growth of consumption and investment remains subdued. There is also a risk of global financial market tensions as interest rates adjust and diverge across the major economies.  The social cost of the crisis and the increased inequalities need to be addressed to make growth more inclusive and to reduce pressures for protectionism and other populist responses.

OECD Chief Economist Catherine L. Mann said: “The pick-up in growth from countries taking fiscal initiatives is broadly welcome, but we cannot ignore the danger that the recovery gets knocked off track by policy errors or financial risks and vulnerabilities. Coherent and committed policy action is needed to simultaneously raise growth rates and improve inclusiveness.”

Citations from: www.oecd.org/economy/economicoutlook.htm

Situation in some countries

In the United States, domestic demand is set to strengthen, helped by gains in household wealth and a gradual upturn in oil production. GDP growth is expected to pick up to 2.4% this year and 2.8% in 2018, supported by an anticipated fiscal expansion, despite higher long-term interest rates and a stronger dollar.

The moderate pace of growth is expected to continue in the euro area but is being held back in some countries by stubbornly high unemployment and underemployment (particularly of youth)  as well as by banking sector weakness. GDP for the area as a whole is expected to expand at an annual rate of 1.6% in both 2017 and 2018.

In Japan, fiscal easing and improvements to women’s labour force participation will help GDP growth pick up this year to 1.2% from 1.0% in 2016. Prospects will depend on the extent to which labour-market duality is reduced and wage growth picks up.

Growth in China is projected to slip further to 6.5% this year and to 6.3% in 2018 as the economy makes a necessary transition away from a reliance on external demand and heavy industry toward domestic consumption and services.

Higher commodity prices and easing inflation are supporting a recovery from deep recessions in Brazil and Russia, underlines OECD report.

The OECD says governments need to manage risks, enhance economic resilience and strengthen the environment to boost growth, with improvements in both productivity and inclusiveness. Focusing on policies that build structural elements into fiscal initiatives would reduce the burden on monetary policy in the advanced economies and help to boost trade, investment, productivity and wages.

 The Interim Economic Outlook and additional information is on the following web link:   www.oecd.org/economy/economicoutlook.htm.

Economic and financial conditions for growth

The Economic Outlook forecasts and accompanying analyses are conditional on a consistent set of assumptions about policies and underlying economic and financial conditions, including fiscal and monetary policy settings, exchange rates, commodity prices and international financial markets.

- Macroeconomic policies. Macroeconomic policies are typically assumed to be "unchanged" over the projection period and on the basis of current fiscal and monetary policies. This does not mean that the OECD necessarily assumes that governments will – or should - achieve their stated objectives, or that policies themselves may not adapt to differing economic circumstances. Rather the OECD forecasts represent the likely outcomes for growth, inflation, employment and other key economic variables for given unchanged policy settings.

- Fiscal policies. Fiscal policy assumptions are based as closely as possible on legislated tax and spending provisions. Where government plans have been announced but not legislated, they are incorporated if it is deemed clear that they will be implemented in a shape close to that announced. Otherwise, in countries with impaired public finances, a tightening of the underlying primary balance by a certain percentage of GDP is built into the projections.

- Domestic monetary policies. The monetary policy assumptions take into account a range of monetary and financial indicators, including policy announcements with respect to the choice of monetary targets, associated target ranges and policy instruments, by the national authorities.  Policy controlled short-term interest rates are typically assumed to be set in line with the stated objectives of the relevant monetary authorities, conditional upon the OECD projections of activity and inflation, which may differ from those of the monetary authorities.  The resulting interest rate profiles should therefore not to be interpreted as a projection of central bank intentions or market expectations thereof. 

The resulting paths of short-term interest rates are assumed to feed into long term interest rates in a manner consistent with the usual expectations hypothesis of the term structure of interest rates, by which long-term interest rates are an average of future short-term rates. In addition, account is taken of the term premia, the extra amount of yield that investors in longer-term bonds in each economy require as compensation for the risk of capital losses and/or lack of liquidity.

For countries with government gross debt exceeding 75 percent of GDP, the term premium is assumed to rise with the level of debt.

- Exchange rates. Nominal exchange rates against the US dollar are set by technical assumption to remain constant over the projection period, at levels prevailing on a pre-specified cut-off date. The corresponding profiles of nominal and effective exchange rates beyond the current year are therefore typically constant for all countries and regions. 

There are two reasons for using such a simple technical assumption. Firstly, specific exchange rate forecasts continue to be politically and market sensitive for many countries and areas. At the same time, short-term exchange rate movements are typically quite difficult to predict and, in practice, a naive random-walk model – one assuming nominal rates to remain broadly at current levels - is often found to be no less accurate than predictions based on more complex econometric or statistical relationships.

Nonetheless, to the extent that underlying economic conditions or associated risks may at times suggest possible systematic upward or downward pressures on major currencies, the wider economic consequences of such movements are routinely explored as alternative scenarios, based upon macro-econometric simulations.

- Oil and non-oil commodity prices. The price of a barrel of Brent crude oil is assumed to increase at a rate of $5 per year ($1.25 per quarter) from its observed level when the projections close. Non-oil commodity prices are assumed to be constant over the projection period at their observed levels when the projections close.

References in: http://www.oecd.org/eco/economicoutlook.htm