OECD warns the world is caught in a low-growth trap
Former Federal Reserve chief Alan Greenspan recently voiced fresh concerns about the global economy, telling Fox News, I think you have a very profound long-term problem of economic growth at the time when in the Western world there is a very large migration from being a worker to being a recipient of social benefits.
Now this week the Organisation for Economic Cooperation and Development (OECD) is echoing Greenspans concerns about slowing global growth.
The Paris-headquartered group, which advises 34 member nations, just published its latest Economic Outlook, and the findings are sobering. Global growth has languished over the past eight years as OECD economies have struggled to average only 2% per year, and emerging markets have slowed, with some falling into deep recession, it wrote.
Central banks out of bullets: The world is trapped in a self-fulfilling stagnation loop, and central banks are out of policy tools to combat the problem, its analysts wrote.
It is clear that the reliance on monetary policy alone has failed to deliver satisfactory growth and inflation, it said. Additional monetary policy easing could now prove to be less effective than in the past, and even counterproductive. Low rates are putting massive pressure on bank profits and pension funds, while forcing citizens to save more money rather than spend, it said.
U.S. growth forecast slashed: What do member nations have to do to reverse the stagnation? Take advantage of low interest rates to borrow more to invest in growth-inducing investment and infrastructure projects, for one, it advised.
The need is urgent to act now, OECD chief economist Catherine Mann said. The longer the global economy remains in the low-growth trap, the more difficult it will be to break the negative feedback loops, revive market forces, and boost economies to the high-growth path. As it is, a negative shock could tip the world back into another deep downturn.
Overall a rather mediocre, a rather dismal outlook, OECD Secretary-General,Angel Gurria lamented. Trade is growing at 2% to 3%; it should be growing at 7%.
Hand-in-hand with its grim outlook, the OECD slashed its combined growth estimate for its member nations, from 2.2% to 1.8% this year and from 2.3% to 2.1% in 2017. It also cut its U.S. economic forecast, from 2% this year to just 1.8%.
Major downside risk in Brexit: And the OECD is warning of a massive loss of growth in the United Kingdom should its citizens approve the June 23 Brexit referendum, which would allow Britain to leave the European Union. A potential Brexit is a major downside risk, the effects of which could be felt worldwide, it said.
A Brexit would hurt the whole world by leading to economic uncertainty and hinder trade growth, with global effects being even stronger if the British withdrawal from the EU triggers volatility in financial markets, it predicted.
A Brexit would cost each UK worker the equivalent of about $4,600 a year by 2030, and perhaps even more, the OECD said, while UK GDP post-Brexit would be 5% smaller by 2030 a major negative shock.
Chinese economy struggling: As the OECD issued its report, fresh economic data underscored its concerns. Three separate surveys of Chinese economic activity released Wednesday revived doubts over the durability of the recovery in the worlds second-largest economy, CNBC reported, citing the May PMI report, the Caixin manufacturing index, and a survey of Chinas services industry.
Meanwhile, the Baltic Dry Index, the bellwether gauge for global trade, is at one of its lowest levels ever, Business Insider noted. Its up 109% since bottoming this past February but is still 9% below its previous lowest levels of December 2008 during the worst depths of the global economic crisis. And its down 95% from its all-time highs of May 2008.
U.S. data present mixed picture: And in the U.S., construction spending in April plunged to its lowest level since 2009, and while the Institute for Supply Managements PMI manufacturing gauge for May surprised to the upside, so-called hard data on manufacturing has been generally weak, CNBC reported. Nonetheless, with a relatively positive Beige Book economic survey out Wednesday, the odds of a Fed rate hike are rising.
It remains to be seen whether the OECD member nations will take the organizations advice. However, its clear that what the central banks have been doing for the past decade isnt working. With the odds increasing of a new downturn erupting after a Brexit or an ill-timed Fed rate hike, now is the time to invest in the financial insurance policies of gold and silver bullion plus rare coins.