19 September 2019

Laurence BooneOECD Chief Economist

OECD INTERIM

ECONOMIC OUTLOOK

Warning: low growth ahead

http://www.oecd.org/economy/outlook/

ECOSCOPE blog: oecdecoscope.wordpress.com

Key messages

2

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

Global growth is weakening

3Note: 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.

Source: OECD Economic Outlook database; and OECD calculations.

G20 EmergingGDP projections, %, year-on-year

G20 AdvancedGDP projections, %, year-on-year

1.2

1.4

1.6

1.8

2.0

2.2

2.4

2.6

1.2

1.4

1.6

1.8

2.0

2.2

2.4

2.6

2017 2018 2019 2020

November 2018 May 2019 September 2019

4.2

4.4

4.6

4.8

5.0

5.2

5.4

5.6

4.2

4.4

4.6

4.8

5.0

5.2

5.4

5.6

2017 2018 2019 2020

November 2018 May 2019 September 2019

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

4

OECD Interim Economic Outlook projections%, year-on-year. Arrows indicate the direction of revisions since May 2019.

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.

Source: OECD Economic Outlook database; and OECD calculations.

GDP growth projections downgraded

downward by 0.6 pp and more no revisiondownward by 0.3 to 0.6 pp downward by less than 0.3 pp upward

Trade growth is stalling

as restrictions bite

5

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.

World trade growthGoods and services, volumes

New trade restrictions in the G20 Trade coverage of measures introduced in each period

0

50

100

150

200

250

300

350

400

450

500USD billion

-4

-2

0

2

4

6

8

10

2016 2017 2018 2019Q2

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

Uncertainty is dragging down

manufacturing and investment

6

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

calculations.

Industrial production Investment growth G20 fixed investment

0

1

2

3

4

5

6

2016 2017 2018 2019Q1

%, y-o-y

-6

-4

-2

0

2

4

6

2014 2015 2016 2017 2018 2019

%, y-o-y

World Germany United States

7

Job creation is slowing

Note: Left: 2019H1 is annualised. Right: PMI for employment in manufacturing and services.

Source: OECD Economic Outlook database; Markit; and OECD calculations.

Employment growth Hiring intentions

0

0.3

0.6

0.9

1.2

1.5

1.8

2.1

Euro area Japan United States

%, y-o-y2016-17 2018 2019H1

48

49

50

51

52

53

54

55

56

57

58

2016 2017 2018 2019

United States Germany Euro area Japan

Index, 3mma

TRADE AND POLITICAL TENSIONS FUEL RISKS OF

PERSISTENT LOW GROWTH

8

9

Trade conflicts are entrenching uncertainty

and risk long-lasting harm to investment

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.

Source: OECD calculations.

Impact of 2019 US-China trade restrictions Difference from baseline after 2 to 3 years

Business investment% %

GDP

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

China UnitedStates

Euro area Japan

-1.2

-1.0

-0.8

-0.6

-0.4

-0.2

0.0

-1.2

-1.0

-0.8

-0.6

-0.4

-0.2

0.0

China United States World

-1.2

-1.0

-0.8

-0.6

-0.4

-0.2

0.0

-1.2

-1.0

-0.8

-0.6

-0.4

-0.2

0.0

2020 2021 2022

Direct effects Uncertainty-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

2020 2021 2022

Direct effects Uncertainty

10

A no-deal Brexit would have large costs

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.

Source: OECD calculations, using the NiGEM global macroeconomic model.

UK GDP%, difference from baseline

Euro area GDP%, difference from baseline

11

Impact of a no-deal on production by sector, medium to long term%, difference from baseline

A no-deal Brexit would lead to sectoral

disruptions in European economies

Note: Production in volume.

Source: OECD calculations using the OECD METRO model.

UK EU27

-2.0 -1.6 -1.2 -0.8 -0.4 0.0

Electronic equipment

Materials manufacturing

Transport equipment

Agri-food

Metals

Machinery & equipment

Chemicals

-24 -20 -16 -12 -8 -4 0

Electronic equipment

Materials manufacturing

Transport equipment

Agri-food

Metals

Machinery & equipment

Chemicals

0

20

40

60

80

100

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

% AAA AA A BBB

0.0

0.5

1.0

1.5

2.0

2.5

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

USD billionHighly-leveraged loans in Europe

Highly-leveraged loans in the United States

Leveraged loans in Europe

Leveraged loans in the United States

12

Investors hold massive amounts of risky debt

Corporate leveraged loans outstandingInvestment-grade corporate bonds% share of bond issuance, by rating

.

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.

Source: Patalano and Roulet (2019); and Çelik and Isaksson (2019).

USD

499 bln

USD

336 bln

USD

91 bln

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

1975 1980 1985 1990 1995 2000 2005 2010 2015

Trend GDP growth Trend labour productivity growth

2018

%, y-o-y

13Note: Solid lines are linear projections. Trend GDP growth is the growth rate of potential output.

Source: OECD Economic Outlook database.

The long-term decline in trend growth

could persist

OECD economies

%, y-o-y

GOVERNMENTS CAN REVERSE THE SPIRALING COSTS OF UNCERTAINTY

AND INVEST MORE

14

Monetary policy: little room for manoeuvre

in advanced economies

15Note: Yield curves on benchmark government bonds as of 16 September 2019.

Source: Refinitiv; and ECB.

Yield curves on government bonds

United States Euro area Japan

-1

0

1

2

3

4

5

0 3 6 9 12 15 18 21 24 27 30

Sep-2019 Sep-2018

%

maturity (years)

-1

0

1

2

3

4

5

0 3 6 9 12 15 18 21 24 27 30

Sep-2019 Sep-2018

%

maturity (years)

-1

0

1

2

3

4

5

0 3 6 9 12 15 18 21 24 27 30

Sep-2019 Sep-2018

%

maturity (years)

Fiscal and structural policies should accompany

central bank efforts in the Euro area

16

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.

Source: OECD calculations, using the NiGEM global macroeconomic model.

Real GDP, euro area%, difference from baseline

Asset prices after five years%, difference from baseline

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

Year 1 Year 2 Year 5 Long run

QE With public investment and structural reforms

0

2

4

6

8

10

12

14

16

House prices Equity prices

QE With public investment and structural reforms

17Note: The last data point is August 2019. Both series are global.

Source: policyuncertainty.org; Markit; and OECD calculations.

Restoring business confidence

would revive investment

98.5

99.0

99.5

100.0

100.5

101.0

101.5

102.0

0

50

100

150

200

250

300

350

2011 2012 2013 2014 2015 2016 2017 2018 2019

IndexIndex, 3mma Economic policy uncertainty index (lhs) Business confidence (rhs)

Meeting infrastructure investment needs would

help escape the risk of persistent low growth

18Note: The scenario does not include the additional investments needed to meet carbon emissions targets.

Source: OECD Technical note on estimates of infrastructure investment needs, 2017.

Infrastructure investment needsGlobal annual average spending needs by 2030

0.0 0.5 1.0 1.5 2.0 2.5

Airports and ports

Rail

Energy demand/efficiency

Telecoms

Power and electricity

Water and sanitation

Primary energy supply

Road

Trillion USD, 2015 prices

Key messages

19

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