The global economy is shrouded in “high uncertainty” as the outlook for emerging markets deteriorates sharply and trade tensions intensify, the Organization for Economic Cooperation and Development said.
The gloomy analysis has pushed the Paris-based institution to cut its global growth forecasts for this year and next with particularly sharp revisions for Turkey, Argentina, South Africa and Brazil.
Since its last economic forecasts in May, the OECD said differences between economies have widened, confidence has fallen, and business surveys across the world point to a slowdown.
Simply put: “The expansion may now have peaked,” the OECD said.
Trade is a central source of risk in the OECD’s analysis. Tariffs and policy changes have already buffeted flows and prices in some areas, and affected sentiment and investment plans. Global trade has cooled faster than expected, falling to around 3 per cent in the first half of 2018 from 5 per cent in 2017.
As the U.S.-China trade war deepened this week with Beijing saying it will retaliate to President Donald Trump’s order for more tariffs, the OECD warned things could get much worse.
“A further rise in trade tensions would have significant adverse effects on global investment, jobs and living standards.”
The rise in protectionism is an added threat for emerging market economies, already suffering from tighter financial conditions and weaker growth prospects. The OECD slashed its forecast for Turkish growth next year by 4.5 percentage points to only 0.5 per cent. For Argentina, it now forecasts a 1.9 per cent contraction this year and stagnation in 2019.
For now, broader contagion across emerging markets has been avoided, the OECD said. But it warned there could be “deeper tensions” and an even wider decline in investor sentiment, particularly if central banks in advanced economies tighten monetary policy faster than expected.
Still, the OECD said the U.S. Federal Reserve should continue to normalize its policy given strong near-term growth and likely inflation pressures from low unemployment.
It offered less clear support for the European Central Bank’s exit plans, saying increased uncertainty about Italy and Brexit, as well as moderate growth prospects, may require “a more gradual pace of normalization.”