I doubt too many folks are going to care about this because OECD updates don’t exactly qualify as page-turners, but we’ll highlight it anyway as it further bolsters the “synchronous global slowdown” narrative.
On Wednesday, in their latest interim economic update, the Paris-based Organization for Economic Cooperation and Development slashed their outlook for global growth – again.
The accompanying commentary underscores all the familiar themes, from Europe on the brink of recession to trade tensions weighing on the overall outlook to China’s ongoing deceleration.
Here’s chief economist Laurence Boone:
The global expansion is continuing to lose steam, and faster than anticipated a few months ago. Growth in Europe has been particularly disappointing, as trade growth both within the EU and with external partners has stalled. Business and consumer confidence has plummeted in advanced economies as trade tensions persist, high levels of policy uncertainty in Europe linger, and the pace of China’s slowdown continues to raise concerns.
The outlook was revised lower for virtually all G20 economies from the November report. Some of the largest revisions are concentrated in the eurozone, which isn’t surprising given that Italy is already in a recession and Germany narrowly dodged a similar fate in Q4.
Overall, global growth is seen at 3.3% in 2019 from 3.6% in 2018. The OECD sees the global economy expanding at a 3.4% pace in 2020.
They cite three “major sources of risk”, with trade topping the list. As we noted on Tuesday, Donald Trump’s decision to do away with key trade concessions that permit duty-free entry for thousands of products from India and Turkey underscore the notion that once a deal with China is sealed, the administration may move ahead with aggressive measures against other trade partners.
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“The continued uncertainty about trade policies remains a significant drag to global investment, jobs and, ultimately, living standards”, the OECD warns, adding that “even if the United States and China conclude a trade agreement soon, we cannot exclude that other measures will be implemented later in 2019, or that new restrictions will be put in place in specific trade-sensitive sectors, such as cars.”
The OECD reiterates familiar concerns about whether China’s stimulus efforts will be effective. Obscene leverage, a clogged monetary policy transmission channel and, relatedly, an apparent lack of demand for credit all suggest that engineering a rebound will be more difficult than it’s been in the past. Here’s the OECD:
There is considerable uncertainty about the extent of China’s slowdown. The government has put in place sizable monetary and fiscal stimulus, including tax cuts and infrastructure investment. However, the jury is still out regarding the effectiveness of these fiscal measures. Meanwhile, corporate sector indebtedness is at very high level, posing risks to financial stability.
The organization also reiterates that without a turn in China’s credit cycle and a concurrent inflection in the country’s economic trajectory, global growth will likely have a difficult time getting off the mat.
“China has significantly contributed to global growth for the past two decades, so that any sharper deceleration than expected would cascade to the rest of the world”, the OECD cautions.
Finally, they note that the interconnectedness of the euroarea means trouble in Italy, Germany and the UK can’t be quarantined. To wit:
In Europe further weakness coming from China, Germany, Italy or the United Kingdom could quickly spread to other European economies, given the importance of trade linkages across the EU: EU countries trade more between themselves than with the rest of the world, and very often goods or services are produced across several countries. In the euro area, where most credit to firms is distributed through banks, the weakness could be aggravated if sovereign yield increased, raising banks funding costs and in turn reducing credit supply, dampening investment and consumption, and ultimately jobs.
Oh, and the OECD also cautions that the dramatic rise in corporate leverage could cause serious problems in the event the burgeoning global slowdown spirals.
“A sharper-than-expected slowdown in global growth could trigger corporate bonds downgrades or even defaults”, they warn, on the way to reminding everyone that “the outstanding stock of corporate bonds at the end of 2018 was twice that in 2008 in real terms (at USD 13 trillion), the quality of outstanding debt has continued to decline, and there are signs that corporate earnings growth has begun to slow.”
So, there you go. It’s all going in the wrong direction and the risks are myriad.
Any questions?
If so, you can direct them to the OECD directly, because as you can see from the following sad screengrab from the press conference, there’s more than enough room for you to squeeze one in:
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