Ángel Gurría

OECD Secretary-General

Catherine L. MannOECD Chief Economist

OECD ECONOMIC OUTLOOK

Escaping the Low-Growth Trap? Effective Fiscal Initiatives, Avoiding Trade Pitfalls

www.oecd.org/economy/economicoutlook.htmECOSCOPE blog: oecdecoscope.wordpress.com/

 Paris, 28 November 201611h00

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Key messages

The global economy remains in a low-growth trap, but more active use of fiscal policy will raise growth modestly• Investment and trade are weak, weighing on drivers of consumption

such as productivity and wages

Policy uncertainties and financial risks are high

• But low interest rates create window of opportunity

Fiscal, structural, trade policies need to be interwoven for gains

• Reducing trade costs raises growth but trade restrictions put jobs at risk

• Expansionary fiscal initiative to boost growth and reduces inequality would not impair fiscal sustainability

• Success of fiscal initiatives depends on structural policy ambition Collective action enables greater gains at lower political cost

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Growth projections depend on fiscal actions in major economies

Note: Based on macro-model simulations of an assumed fiscal stimulus in the US worth ¾ per cent of GDP in 2017 and 1¾ per cent of GDP in 2018; estimated fiscal stimulus in China of 1½ per cent of GDP in 2016 and 1 per cent of GDP in both 2017 and 2018; and estimated fiscal stimulus in the euro area of 0.4 per cent of GDP in 2016, 0.2 per cent of GDP in 2017 and 0.3 per cent of GDP in 2018. The stimulus in China and the euro area is assumed to be implemented through government final expenditure on consumption. Source: OECD November 2016 Economic Outlook database; and OECD calculations.

World real GDP growth

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Economic Outlook Forecasts

1. Per cent. GDP volumes at market prices adjusted for working days.2. Difference in percentage points based on rounded figures.3. With growth in Ireland in 2015 computed using gross value added at constant prices excluding foreign-owned multinational enterprise dominated sectors.4. Fiscal years starting in April.

GDP growth1

2015 2018

Column2 Column3November Projections

Difference from September

Projections2

November Projections2

Difference from September

Projections22

November Projections2

World 3.1 2.9 0.0 3.3 0.1 3.6

United States 2.6 1.5 0.1 2.3 0.2 3.0Euro area3 1.5 1.7 0.2 1.6 0.2 1.7 Germany 1.5 1.7 -0.1 1.7 0.2 1.7 France 1.2 1.2 -0.1 1.3 0.0 1.6 Italy 0.6 0.8 0.0 0.9 0.1 1.0Japan 0.6 0.8 0.2 1.0 0.3 0.8Canada 1.1 1.2 0.0 2.1 0.0 2.3United Kingdom 2.2 2.0 0.2 1.2 0.2 1.0

China 6.9 6.7 0.2 6.4 0.2 6.1India4 7.6 7.4 0.0 7.6 0.1 7.7Brazil -3.9 -3.4 -0.1 0.0 0.3 1.2

2016 2017

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Without policy ambition, the low-growth trap and

high financial risks will persist

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Consumption and investment in advanced economies remain sluggish next to past recoveries

Consumption Investment

Note: OECD shown. Current recovery shows since 2008Q1 including the forecasts in the dotted line. Previous 3 recoveries pre-recession peak in 1973Q4, 1980Q1 and 1990Q3.Source: OECD November 2016 Economic Outlook database.

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Weak labour productivity means weak wage growth in advanced economiesLabour productivity Real wage

Note: OECD shown. Current recovery shows since 2008Q1 including the forecasts in the dotted line. Previous 3 recoveries pre-recession peak in 1973Q4, 1980Q1 and 1990Q3.Source: OECD November 2016 Economic Outlook database.

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Low interest rates have supported rising asset prices and credit growth

Source: BIS; and OECD Analytical House Price database.

Real house prices in key advanced economies Corporate debt in key EMEs

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High asset prices and rising corporate debt raises vulnerability to a sharp rise in bond yields

10-year government bond yields

Source: Thomson Reuters.

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Capital flows to EMEs are vulnerable to risk perceptions and exchange rate uncertainty has increased

Source: Bloomberg; IMF Balance of Payments Statistics; and Thomson Reuters.

EME capital inflows and volatility Implied exchange rate volatility for major EMEs

Average for Brazil, Mexico, South Africa and Turkey

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Reducing trade costs raises growth but trade restrictions

put jobs at risk

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Trade restrictions rising in G20 countriesNumber of trade restrictive measures in-force since the crisis

World trade growth is exceptionally weak

and protectionism is risingWorld trade and GDP growth

Note: World GDP volumes measured at PPP exchange rates. World trade volumes measured at market exchange rates in US dollars.For 2014, world trade average growth for four years to remove the rebound following the crisis.Source: OECD November 2016 Economic Outlook database; and WTO-OECD-UNCTAD 2016 G20 Trade Policy Monitoring Report.

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Reducing trade costs raises outputImplementing trade restrictions would hurt output

Medium-term GDP impact of different trade scenarios

Note: The implementing trade facilitation measures scenario shows the impact of a trade cost reduction by 1.3% across all sectors in all countries, an estimate of the global average derived from the OECD’s Trade Facilitation Indicators. The imposing trade restrictions in major economies scenario shows the impact of a goods trade cost increase of 10 percentage points for China, Europe and the United States against all trading partners, equivalent to an average increase in tariffs to 2001 levels, the year when trade negotiations under the Doha Development Round started.Source: OECD METRO model; and OECD calculations.

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Trade restrictions would put jobs at risk, better policies would help share gains

from trade

Note: For 2011, latest available.Source: OECD TiVA database.

Avoid new trade protectionist measures and roll back existing ones

Provide job search assistance and re-employment support for workers in transition

Use active labour market policies to promote skills upgrading and life-long learning

Strengthen social protection, coverage and effectiveness

Policy recommendations:Share of total employment embodied in foreign demand

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Use the space for fiscal initiatives and structural reforms to

boost growth and equity

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Contractionary Mildly contractionary Broadly neutral Mildly expansionary Expansionary

Contractionary

Mildly contractionary ARG, BRA, COL, CRI, GRC, SVK

BEL AUS, GBR, IDN, KOR

Broadly neutral

CHL, CZE, DNK, ESP, IND, IRL, ISR, JPN,

LTU, MEX, NZL, PRT,TUR, SWE, ZAF

FRA, RUS, AUT, FIN, NLD

CHE

Mildly expansionary HUN SVN CAN, ITA, NOR, POL

DEU, EST, LVA

Expansionary ISL CHN USA, LUX

OECD recommends less expansionary policy than projected

Recommended fiscal stance for 2017

Projected fiscal stance

for 2017

OECD recommends more expansionary policy than projected

Most countries are moving toward the right fiscal stance, but many could do more

Source: OECD November 2016 Economic Outlook database; and OECD November 2016 Economic Outlook Special Chapter, “Using fiscal levers to escape the low growth trap”.

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Low interest rates have created a window of opportunity for governments to spend

Fall in government interest payments Estimated budget gains over 2015-17 due to lower interest rates

Note: Budget gains calculated based on general government debt at the end of 2014, assuming that 25% of this initial debt stock matures each year, comparing the interest rate on 10-year government bonds in 2014 with the interest rate for 2015 and the 2016 average to August for 2016 and 2017. Source: OECD June 2016 Economic Outlook database; and OECD calculations.

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There is room for a multi-year fiscal initiative

in almost all advanced countries Number of years a permanent investment increase of 0.5% of GDP can be funded with temporary deficits

Source: OECD calculations based on Mourougane A. et al. (2016), “Can an increase in public investment sustainability lift economic growth?” OECD Economics Department Working Papers, No. 1351, OECD Publishing, Paris.

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Choose fiscal spending to maximise impact on growth and inclusiveness

Impact of spending reform Growth Income of the poor

Countries with most room for gains

Improving education CHL, GRC, MEX, PRT, TUR

Increasing public investment and R&D DEU, GBR, IRL,

ITA, MEX, TUR

Increasing government effectiveness FRA, GRC, HUN,

ITA, SVN

Pension reform DEU, FIN, FRA, JPN, POL

Increasing family benefits CHE, ESP, GRC, PRT

Decreasing public subsidies BEL, CHE

Source: Fournier and Johansson (2016), “The Effect of the Size and the Mix of Public Spending on Growth and Inequality”, OECD Economics Department Working Papers, No. 1344, OECD Publishing, Paris.

positive impact uncertain or no impact

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Fiscal initiatives would strengthen growth both in the short- and long-term

Long-term GDP gainFrom a 0.5% of GDP increase in public investment

First-year growth gain

Note: Structural reforms shows the impact of a 10% reduction of product market regulations.Source: Mourougane A. et al. (2016), “Can an increase in public investment sustainability lift economic growth?” OECD Economics Department Working Papers, No. 1351, OECD Publishing, Paris; and OECD calculations.

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Structural policy ambition needs to be stepped up

Source: OECD Going for Growth 2017, forthcoming.

OECD Going for Growth recommendations implementedShare by policy area, average for all countries, 2015-16

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Comprehensive and collective approach needed on fiscal and structural policies

Use window of opportunity for fiscal initiatives

• Focus on quality investment to boost human capital and infrastructure• Combine with structural policies to raise demand, long-term

potential output and equality• Collective action magnifies gains

Implement ambitious policy packages to boost growth, inclusiveness, and to share gains from trade• Increase the pace of structural reforms and supporting actions

• Many policies boost inclusive growth, productivity and employment

• Maintain open markets for trade and investment• Support by domestic policies to help worker transition, strengthen

social protection and ensure gains are shared