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OECD slashes growth forecasts for leading economies OECD slashes growth forecasts for leading economies
(about 5 hours later)
The global economy faces headwinds from a sluggish eurozone and rising political tensions, including the uncertain outcome of Scotland's independence referendum, a leading thinktank has warned.The global economy faces headwinds from a sluggish eurozone and rising political tensions, including the uncertain outcome of Scotland's independence referendum, a leading thinktank has warned.
The Organisation for Economic Co-operation and Development (OECD) has slashed its growth forecasts for advanced economies and called on the European Central Bank to use quantitative easing (QE) to shore up the eurozone. The Organisation for Economic Co-operation and Development slashed its growth forecasts for advanced economies and called on the European Central Bank (ECB) to use quantitative easing to shore up the eurozone.
Updating its economic outlook before a G20 meeting of finance ministers in Australia this week, the Paris-based OECD described continued slow growth in the euro area as the "most worrying feature" of its new projections. The OECD's forecasters slightly downgraded their forecast for UK economic growth this year and said that Scotland remaining part of the country would be "best for all its component parts".
The OECD deputy secretary-general Rintaro Tamaki said: "The global economy is expanding unevenly, and at only a moderate rate. Trade growth therefore remains sluggish and labour market conditions in the main advanced economies are improving only gradually, with far too many people still unable to find good jobs worldwide. Updating its economic outlook before a G20 meeting of finance ministers in Australia this week, the Paris-based thinktank described continued slow growth in the euro area as the "most worrying feature" of its new projections.
Its deputy secretary-general Rintaro Tamaki said: "The global economy is expanding unevenly, and at only a moderate rate. Trade growth therefore remains sluggish and labour market conditions in the main advanced economies are improving only gradually, with far too many people still unable to find good jobs worldwide.
"The continued failure to generate strong, balanced and inclusive growth underlines the urgency of undertaking ambitious reforms.""The continued failure to generate strong, balanced and inclusive growth underlines the urgency of undertaking ambitious reforms."
The OECD now forecasts eurozone GDP growing just 0.8% this year, down from the previous forecast for 1.2% growth made in May's outlook. In 2015, the OECD expects the eurozone to grow 1.1%, down from 1.7% forecast in May. The OECD now forecasts eurozone GDP will grow just 0.8% this year, down from the previous forecast for 1.2% growth made in May's outlook. In 2015, it expects the eurozone to grow 1.1%, down from the 1.7% forecast in May.
It also cut its US GDP forecast for this year to 2.1% from 2.6%. For the UK just shaved off 0.1 percentage points to 3.1%. The forecast for the UK in 2015 was edged up to 2.8% from 2.7%. It also cut its US GDP forecast for this year to 2.1% from 2.6%. For the UK, the 2014 forecast was reduced by 0.1 percentage points to 3.1%. The forecast for the UK in 2015 was edged up to 2.8% from 2.7%.
The thinktank highlighted Thursday's referendum on Scotland's independence among several risks for growth. The thinktank highlighted Thursday's vote in Scotland among several risks for growth.
It wrote: "Geopolitical risks have grown in recent months, with an intensification of conflicts in Ukraine and the Middle East and increasing uncertainty about the outcome of the referendum on Scottish independence."It wrote: "Geopolitical risks have grown in recent months, with an intensification of conflicts in Ukraine and the Middle East and increasing uncertainty about the outcome of the referendum on Scottish independence."
But it was the eurozone that drew the most attention from the OECD's economists, who called on the ECB to do more on top of rate cuts and bond-buying programmes. But it was the eurozone that drew the most attention from OECD economists, who called on the ECB to do more on top of rate cuts and bond-buying programmes.
"Given the low-growth outlook and the risk that demand could be further sapped if inflation remains near zero, or even turns negative, the OECD recommends more monetary support for the euro area," said the thinktank. "Recent actions by the European Central Bank are welcome, but further measures, including quantitative easing, are warranted. Given the weakness of demand, European countries should also use the full degree of flexibility available within the EU's fiscal rules." "Given the low-growth outlook and the risk that demand could be further sapped if inflation remains near zero, or even turns negative, the OECD recommends more monetary support for the euro area," said the thinktank.
"Recent actions by the European Central Bank are welcome, but further measures, including quantitative easing [QE], are warranted."
The ECB surprised markets this month when it unveiled fresh measures to boost the flagging eurozone economy. Policymakers cut the already ultra-low main interest rate from 0.15% to 0.05%. They also made it more expensive for banks to park money with the ECB – cutting the deposit rate, which was already negative, from -0.1% to -0.2% in the hope of persuading banks to lend more to businesses and consumers.The ECB surprised markets this month when it unveiled fresh measures to boost the flagging eurozone economy. Policymakers cut the already ultra-low main interest rate from 0.15% to 0.05%. They also made it more expensive for banks to park money with the ECB – cutting the deposit rate, which was already negative, from -0.1% to -0.2% in the hope of persuading banks to lend more to businesses and consumers.
The central bank also announced further measures to encourage lending by buying asset-backed securities but stopped short of embarking on full-scale QE, which would potentially involve the bank purchasing government debt.The central bank also announced further measures to encourage lending by buying asset-backed securities but stopped short of embarking on full-scale QE, which would potentially involve the bank purchasing government debt.
The OECD's gloomier outlook coincided with weaker manufacturing numbers from both China and the United States. Financial markets were shaken after data released over the weekend showed China's industrial sector posted the weakest growth since the financial crisis began six years ago.
In the US, manufacturing output declined in August for the first time in seven months, reflecting a sharp fall in production at car plants after a jump in July. But economists said that was likely down to difficulties in adjusting the data for usual seasonal fluctuations and that the underlying picture of US industrial production was robust.
"Auto production shot up by 9.3% month-on-month in July as fewer plants than normal closed for the annual summer retooling. The fall in August is just the reversal of this move as fewer plants than normal ramped up production again," explained Paul Dales, senior US economist at Capital Economics.
Optimism about the outlook for US manufacturers was fanned by the latest Empire manufacturing survey, produced by the New York Federal Reserve, which bounced back to a near five-year high.
"Pretty much all of the survey evidence suggests that output growth will strengthen in the coming months," added Dales.