Positive economic outlook for the main economies in Latin America but downward risks have intensified

Category: Argentina,Brazil,chile,Colombia,Costa Rica,Economic outlook,Mexico,Uncategorized
written by oecdecoscope | November 22, 2018

Alvaro S. Pereira (Director) and Latin American desks, Economics Department, Country Studies Branch, OECD

The global economy is navigating rough seas. Global GDP growth is strong but it has peaked. In many countries unemployment is well below pre-crisis levels, labour shortages are biting and inflation remains tepid.  Yet, global trade and investment have been slowing on the back of increases in bilateral tariffs while  many emerging market economies are experiencing capital outflows and a weakening of their currencies. The global economy looks set for a soft landing, with global GDP growth projected to slow from 3.7% in 2018 to 3.5% in 2019-20. However, downside risks abound and policy makers will have to steer their  economies carefully towards sustainable, albeit slower, GDP growth.

The economic recovery in the Latin American economies has become dissimilar. While in some countries, growth has been revised downwards, in others it has been revised upwards. This disparity is closely linked to how these economies have evolved in the face of the financial stress and increased financial volatility in recent months. The region’s economies with the best macroeconomic fundamentals, independent central banks, countercyclical monetary policies, sound fiscal policy framework and no major currency mismatches in corporate or sovereign debt, were better able to sail the adverse global financial conditions that led to capital outflows, weakening their currencies.

Table LAC EO104

While Chile and Colombia have gained momentum, Brazil has shown lower growth and Argentina has fallen into recession. Mexico and Costa Rica have also experienced less momentum than expected. Growth in Argentina, Brazil, Chile, Colombia, Costa Rica and Mexico, countries covering about 85% of Latin America’s GDP, is expected to be around 1.4% this year and to accelerate to 2.0% in 2019 and 2.7% in 2020 (weighted average) (see Table). However, downside risks abound while the region is vulnerable to the global context. Several indicators, such as the fiscal and current account deficits have been accentuated in the last decade in most of these economies (Figure), suggesting that the region is still vulnerable. Needs to be noted that the situation is uneven and a broader list of indicators should be analysed.

Figure LAC EO104

An accumulation of risks could create the conditions for a harder-than-expected landing. First, further trade tensions would take a toll on trade and GDP growth, generating even more uncertainty for business plans and investment. Second, tightening financial conditions could accelerate capital outflows from the region and depress demand further. Third, a sharp slowdown in China would hit Latin America and other emerging economies, but also advanced economies if the demand shock in China triggered a significant decline in global equity prices and higher global risk premia.

Looking ahead, it will be necessary to strengthen the macroeconomic policy framework to reduce vulnerabilities where necessary. Most of the region’s economies are starting, or will start in the near future, more restrictive monetary policies, while also undertaking fiscal consolidation. Depending on each country, it will be important to find a balance between the needs for social spending and public investment, with the need to put debt on a sustainable path. In Chile, Colombia and Mexico, this consolidation can be done gradually, but Argentina, Brazil and Costa Rica need to do it more urgently. Pension or tax reforms will be necessary in this regard.

Given the limited scope for countercyclical policies, in the face of external risks and a more pronounced slowdown, the time to promote the necessary structural reforms is now to guarantee a future with a sustained increase in productivity and greater inclusion. Many countries in the region have scope to reform the tax system and make it more effective in improving investment incentives and raising more resources. Depending on the characteristics of each country, possible measures may include limiting the use of tax exemptions and reduced rates, particularly in VAT, but also in corporate taxes, extending the tax base by including more people in personal income taxes, reducing evasion or making greater use of property, inheritance or environmental taxes. Other priorities should focus on export promotion and diversification, which would help reduce current account deficits. Investing in quality and innovative human capital, closing infrastructure and logistical gaps, and curbing corruption would support exports and their diversification, strengthening growth. Encouraging women’s participation in the labour force, reducing precariousness and informality in the labour market, as well as pension reforms are also urgent in several countries of the region and necessary to increase productivity and reduce inequalities.

Argentina: A combination of massive fiscal and monetary tightening will keep the economy in recession during 2018 and 2019. Private consumption and investment will remain depressed due to lower real incomes and high interest rates, and unemployment will rise. However, a better harvest and a lower real exchange rate will support stronger exports.

Brazil: Growth will gain momentum during 2019 and 2020 as private consumption, supported by improvements in the labour market, will increase. Recovering credit and greater policy certainty as a new administration takes office will buttress the recovery. Political uncertainty around the implementation of reforms remains significant and could derail the recovery, but if uncertainty fades and reforms advance as assumed, investment will become stronger.

Chile: Growth is projected to remain strong over the next two years. With an uncertain external environment, solid domestic demand will underpin growth, aided by a stable inflation environment, public infrastructure projects and a tax reform. Inequality, though  decreasing, remains high, as informality and unemployment remain high and social transfers low.

Colombia: Growth is projected to pick up as infrastructure projects, lower corporate taxes and higher oil prices will boost investment. Improving confidence and financing conditions will support consumption. As growth gains traction, unemployment will edge down. Social indicators are improving but informality and inequality remain high.

Costa Rica: Growth is projected to recover to around 3¼ per cent in 2020 and be broad-based, underpinned by both domestic and external demand. However, uncertainty, particularly surrounding the planned fiscal reforms, is weighing on growth in the near term. The projections are based on the assumption that the fiscal reforms will be implemented from 2019, with modest fiscal tightening holding back growth in 2019 and 2020.

Mexico: Growth is projected to pick up to 2¾ per cent in 2020. Low unemployment, strong remittances and the recovery of real wages  will support household consumption. Investment, which has been persistently low, will strengthen on the back of announced public investment plans and increased confidence associated with the US-Mexico-Canada trade agreement. Exports will decelerate owing to less favourable global conditions, especially in the United States. Inflation has been pushed up by rising energy prices, but expectations and core inflation remain anchored and within the central bank’s target band. Informality is slowly declining but remains elevated,  contributing to persistently high inequalities and low productivity.

To read more about the Economic Outlook and the main structural challenges visit the english and spanish/portuguese version (it includes OECD forecasts and a chapter on decoupling of wages and productivity and the implications for public policy).

References:

OECD (2018), OECD Economic Outlook, Volume 2018 Issue 2: Preliminary version, OECD Publishing, Paris, https://doi.org/10.1787/eco_outlook-v2018-2-en.



Las perspectivas económicas son positivas en los principales países de América Latina pero los riesgos a la baja se han acentuado

Category: Argentina,Brazil,chile,Colombia,Costa Rica,Mexico,Posts in Spanish,Uncategorized
written by oecdecoscope | November 22, 2018

Alvaro S. Pereira (Director) y mesas de países latinoamericanos, Departamento de Economía, Directorado de estudios de países, OCDE

La economía mundial está navegando mares agitados. El crecimiento del PIB mundial es fuerte, pero ha alcanzado su punto máximo. En muchos países, el desempleo está por debajo de los niveles anteriores a la crisis de 2008, la escasez de mano de obra se empieza a sentir, aunque la inflación sigue siendo templada. Sin embargo, el comercio y la inversión mundiales se han desacelerado como consecuencia del incremento de aranceles bilaterales y de mayor incertidumbre política, mientras que varias economías emergentes están experimentando salidas de capitales y un debilitamiento de sus monedas. La recuperación del crecimiento global  comenzará a desacelerarse, mientras que los riesgos a la baja se han acentuado. Se prevé que el crecimiento del PIB mundial disminuya del 3,7% en 2018 a 3,5% en 2019-2020. Sin embargo, abundan los riesgos de recesión y los responsables políticos tendrán que orientar cuidadosamente sus economías hacia un crecimiento sostenible, aunque más modesto, del PIB.

En las principales economías de América Latina, la recuperación económica se ha vuelto despareja. Mientras que en algunas, el crecimiento se ha revisado a la baja, en otras se ha revisado al alza. Esta disparidad está estrechamente ligada a cómo estas economías han evolucionado frente al estrés financiero e incremento de volatilidad financiera de los pasados meses. Las economías de la región con mejores fundamentos macroeconómicos, bancos centrales independientes, políticas monetarias contracíclicas, un marco de política fiscal sólido y sin grande descalce de monedas en la deuda corporativa o soberana, fueron los que sortearon mejor las condiciones financieras globales adversas que sometieron a varios países a una repentina salida de capitales y debilitamiento de sus monedas.

Table LAC EO104 Esp

Mientras que Chile y Colombia han ganado ímpetu, Brasil ha mostrado menor crecimiento y Argentina ha caído en recesión. México y Costa Rica también han experimentado menor ímpetu al esperado. Se espera que el crecimiento en Argentina, Brasil, Chile, Colombia, Costa Rica y México, países que cubren alrededor del 85% del PIB de América Latina, se sitúe en torno al 1.4% este año y se acelere a 2.0% en 2019 y 2.7% en 2020 (promedio ponderado) (Tabla). Sin embargo, abundan los riesgos a la baja, mientras que la región se encuentra vulnerable al contexto global. Algunos indicadores, como los déficits fiscales y de cuenta corriente (Figura) se han acentuado en la mayoría de estas economías en la última década, sugiriendo que la región es aún vulnerable. Debe notarse que la situación es dispar y se debe mirarse una lista más amplia de indicadores.

Una acumulación de riesgos podría crear las condiciones para una desaceleración de crecimiento más acentuada de la esperada. En primer lugar, nuevas tensiones comerciales afectarían al comercio y al crecimiento del PIB, generando aún más incertidumbre para las empresas y la inversión. En segundo lugar, el endurecimiento de las condiciones financieras globales podría acelerar las salidas de capitales y deprimir aún más las monedas de la región. En tercer lugar, una fuerte desaceleración en China afectaría a la región y otras economías emergentes, pero también a las economías avanzadas si el shock de la demanda en China provocara un descenso significativo de los precios mundiales de las acciones y un aumento de las primas de riesgo mundiales.

Figure LAC EO104Esp

De cara al futuro, será necesario reforzar el marco de las políticas macroeconómicas para reducir vulnerabilidades donde sea necesario. La mayor parte de las economías de la región están comenzando, o lo harán en el futuro próximo, políticas monetarias más restrictivas, al tiempo que también deben llevar a cabo una consolidación fiscal. Dependiendo de las holguras de cada país, será importante encontrar un ritmo que balancee las necesidades de gasto social y de inversión pública, con la necesidad de poner la deuda en una senda sustentable. En Chile, Colombia y México, esta consolidación se puede llevar a cabo de manera gradual, pero Argentina, Brasil y Costa Rica necesitan hacerlo de manera más urgente. Reformas pensionales o tributarias serán necesarias en este sentido.

Dado el escaso margen para hacer políticas contracíclicas ante la realización de riesgos externos y una deceleración más acentuada, el momento de impulsar reformas estructurales necesarias es ahora, para garantizar un futuro con incremento sostenido de la productividad y mayor inclusión. Muchos países de la región tienen margen para reformar el sistema tributario y hacerlo más eficaz para mejorar los incentivos a la inversión y recaudar más recursos. Según las características de cada país, posibles medidas pueden incluir limitar el uso de exenciones tributarias y tasas reducidas, en particular en el IVA, pero también en los corporativos, extender las bases de imposición incluyendo más personas en los impuestos a los ingresos personales, reducir la evasión o hacer mayor uso de impuestos a la propiedad, a la herencia o impuestos ambientales. Otras prioridades deberían focalizarse en fomentar las exportaciones, y diversificarlas, lo que ayudaría a reducir los déficits de cuenta corriente. Invertir en capital humano de calidad e innovación, cerrar las brechas de infraestructura y logística y frenar la corrupción apoyarían a las exportaciones y su diversificación, fortaleciendo el crecimiento. Alentar la participación de la mujer en la fuerza laboral, reducir la precariedad e informalidad del mercado laboral, así como reformas al sistema de pensiones son también urgentes en varios países de la región y necesarios para aumentar la productividad y bajar las desigualdades.

Argentina: La economía seguirá en recesión en 2018 y 2019 debido a un endurecimiento fuerte y simultáneo de políticas monetarias y fiscales. El consumo privado y la inversión seguirán siendo bajos a causa del descenso de los ingresos reales y de los elevados tipos de interés, y aumentará el desempleo. Sin embargo, una mejor cosecha y un tipo de cambio real más competitivo contribuirán al aumento de las exportaciones.

Brasil: El crecimiento cobrará impulso en 2019 y 2020 gracias al aumento del consumo privado, respaldado por mejoras en el mercado laboral. La reactivación del crédito y el descenso de la incertidumbre política una vez que el nuevo gobierno tome posesión apuntalarán la recuperación económica. La incertidumbre política sobre la implementación de reformas sigue siendo importante y podría frenar la recuperación pero, si desaparece y las reformas siguen adelante como se supone que deberían hacerlo, aumentará la inversión.

Chile: Según las proyecciones, el crecimiento seguirá aumentando en los próximos dos años. Ante una incierta coyuntura externa, el crecimiento estará respaldado por la sólida demanda interna con ayuda de un entorno de inflación estable, proyectos de infraestructuras públicas y una reforma fiscal. A pesar que las desigualdades han disminuido, permanecen altas, debido a que la informalidad y el desempleo siguen siendo elevados y las transferencias sociales escasas.

Colombia: Las proyecciones indican que el crecimiento repuntará, ya que los proyectos de infraestructuras, el descenso del impuesto de sociedades y la subida de los precios del petróleo potenciarán la inversión. La mejora de la confianza y de las condiciones de financiamiento respaldará el consumo. A medida que el crecimiento se vaya afianzando, el desempleo descenderá. Los indicadores sociales están mejorando, aunque la informalidad y la desigualdad se mantendrán en niveles elevados.

Costa Rica: Según las proyecciones, el crecimiento se recuperará hasta el 3¼ aproximadamente en 2020 y será generalizado, sostenido tanto por la demanda interna como externa. Sin embargo, la incertidumbre, particularmente respecto a las reformas fiscales planificadas está lastrando el crecimiento a corto plazo. Las proyecciones parten del supuesto de que las reformas fiscales se aplicarán a partir de 2019, con un modesto ajuste fiscal que frenará el crecimiento en 2019 y 2020.

México: Está previsto que el crecimiento repunte hasta el 2¾ por ciento hacia 2020. El bajo nivel de desempleo, fuertes remesas y la recuperación de los salarios reales reforzarán el consumo de los hogares. La inversión, que ha sido persistentemente baja, se reforzará a consecuencia de los planes de inversión públicos anunciados y del aumento de la confianza vinculado al acuerdo comercial entre Estados Unidos, México y Canadá. El crecimiento de las exportaciones se reducirá debido a unas condiciones internacionales menos favorables, en especial en Estados Unidos. La subida de los precios de la energía ha empujado la inflación al alza, pero las expectativas y la inflación subyacente siguen ancladas y dentro del rango meta del banco central. El alto nivel de informalidad contribuye a que haya una gran desigualdad y una escasa productividad.

Para leer en más detalle sobre las proyecciones macroeconómicas, así como los principales desafíos estructurales ir al reporte en la versión español/portugués o inglés (que incluye proyecciones para países de la OECD, principales desafíos y un capítulo especial sobre la desvinculación de los salarios y la productividad y las implicancias en términos de políticas públicas).



La Croissance est à son pic, la négociation d’un atterrissage en douceur s’annonce délicate

Category: Economic outlook,Euro Area,European Union,Posts in French,Uncategorized
written by oecdecoscope | November 22, 2018

‌Laurence Boone, Chef économiste de l’OCDE

PE Nov2108L’économie mondiale traverse des zones de turbulences. La croissance du PIB mondial est élevée, mais a probablement atteint son pic. Dans de nombreux pays, le chômage est bien en dessous de ses niveaux d’avant-crise, les tensions sur l’emploi augmentent et l’inflation demeure modérée. Mais les échanges et l’investissement marquent le pas, sur fond de hausse de certains droits de douane. De nombreuses économies émergentes sont confrontées à des sorties de capitaux et ont vu s’affaiblir leur monnaie. L’économie mondiale paraît prête pour un atterrissage en douceur, avec une croissance du PIB mondial qui devrait passer de 3.7 % en 2018 à 3.5 % en 2019-20. Mais les risques s’accumulent et les gouvernements et banques centrales devront naviguer prudemment pour préserver des rythmes de croissance du PIB certes plus modestes, mais durables.

Négocier un atterrissage en douceur a toujours été délicat, mais l’exercice est particulièrement difficile aujourd’hui. Avec des banques centrales qui réduisent progressivement, et à juste titre, leurs injections de liquidités, les marchés ont commencé à revoir les prix des risques, la volatilité fait son retour, le prix de certains actifs baisse. Les flux de capitaux, qui ont contribué à l’expansion des économies de marché émergentes, s’inversent progressivement. Les tensions commerciales génèrent de l’incertitude et risquent de perturber les chaînes de valeur mondiales et l’investissement, plus spécialement dans les régions aux liens étroits avec les États-Unis et la Chine. Des incertitudes politiques et géopolitiques montent également en Europe et au Moyen-Orient.

Une accumulation de risques pourrait créer les conditions d’un atterrissage plus brutal que prévu. La recrudescence des tensions commerciales pourrait peser sur la croissance des échanges et du PIB, et générer encore plus d’incertitude pour l’investissement des entreprises. Le durcissement des conditions financières pourrait accélérer les sorties de capitaux en provenance des économies émergentes et faire reculer encore la demande. Un net ralentissement de l’activité en Chine frapperait non seulement les économies émergentes, mais aussi les économies avancées, si ce choc entraînait un repli des cours des actions et une augmentation des primes de risque dans le monde.

Les tensions politiques autres que commerciales augmentent aussi. Au Moyen-Orient et au Venezuela, les difficultés géopolitiques et politiques ont accru la volatilité des cours du pétrole. En Europe, les négociations autour du Brexit suscitent des inquiétudes. Dans certains pays de la zone euro, l’exposition des banques à la dette souveraine pourrait peser sur la croissance du crédit si les primes de risque devaient encore augmenter, ce qui ralentirait la consommation, l’investissement, la croissance et l’emploi.

Dans ce contexte, nous invitons instamment les responsables politiques à rétablir la confiance dans les institutions internationales et dans le dialogue entre tous les pays. Notamment pour apporter une solution coopérative aux discussions sur les échanges commerciaux. L’adoption de mesures concrètes au niveau du G20 serait aussi un signal positif, démontrant que les pays peuvent agir de manière coordonnée et concertée si la croissance devait ralentir plus nettement que prévu.

La coopération est d’autant plus nécessaire que les marges de manœuvre de politique économique sont limitées. Dans certains pays, les taux sont très bas et la politique monétaire est encore très accommodante, alors que les ratios dette privée/PIB et dette publique/PIB se situent à des niveaux historiquement élevés. Le soutien budgétaire diminue, à juste titre, mais si la croissance devait ralentir plus brutalement, les pouvoirs publics devraient profiter de la faiblesse des taux d’intérêt pour s’engager dans une relance budgétaire coordonnée. Dans cette édition des Perspectives économiques, nous présentons des simulations qui montrent qu’une relance budgétaire coordonnée au niveau mondial serait un moyen efficace de réagir rapidement à un ralentissement plus marqué que prévu.

La fragilité de l’environnement rend d’autant plus important l’achèvement de l’Union monétaire européenne, comme suggéré dans la dernière Étude économique de la zone euro réalisée par l’OCDE. Il est urgent que l’Europe mène à son terme l’union bancaire. L’absence de progrès dans ce domaine n’incite pas les banques à réduire la part, toujours importante, d’obligations souveraines domestiques dans leur bilan, ce qui nourrit la perception du risque de redénomination. Progresser sur la mise en œuvre d’une capacité budgétaire commune aiderait aussi à accroître la confiance dans l’aptitude de la zone euro à réagir aux chocs, et à inscrire la croissance dans la durée.

Enfin, la reprise mondiale depuis la crise financière n’a pas produit d’améliorations tangibles du niveau de vie pour un grand nombre de citoyens. Si la pauvreté absolue a fortement reculé dans un certain nombre d’économies émergentes, la crise a montré que les écarts de bien-être entre la partie de la population mobile et hautement qualifiée et la part, plus nombreuse, de personnes moins mobiles et souvent moins qualifiées, se sont creusés depuis plusieurs décennies dans de nombreuses économies avancées. Les écarts de revenu se perpétuent d’une génération à l’autre : trop souvent les perspectives d’avenir de chaque individu dépendent de l’endroit où il est né, où il a été scolarisé et où il a commencé à rechercher un emploi. Ces inégalités, l’absence de mobilité intergénérationnelle, menacent la croissance et alimentent le rejet de la mondialisation, qui a pourtant été vecteur de prospérité de nombreuses régions du monde.

Le ralentissement des gains de productivité dans de nombreuses économies bride la hausse des salaires réels mais même dans les entreprises très productives, la progression des salaires a été modeste. L’innovation technologique, qui tire vers le bas le prix relatif des investissements, renforce le pouvoir de marché des entreprises très productives. En même temps, la baisse du prix relatif des investissements peut entraîner une substitution du capital au travail, en particulier pour les emplois faiblement qualifiés et répétitifs, pour toutes les entreprises. Avec la diffusion du numérique, le fossé entre les emplois hautement qualifiés peu répétitifs et les emplois faiblement qualifiés répétitifs se creuse. Conjuguées à une redistribution moins poussée, ces tendances risquent d’aggraver les inégalités.

Les pouvoirs publics peuvent faire davantage pour favoriser l’augmentation de la productivité et des salaires. Renforcer la concurrence sur les marchés des produits permettrait de favoriser la croissance de nouvelles entreprises, d’encourager une diffusion plus large des nouvelles technologies, et de contribuer ainsi à une hausse des gains de productivité, mais aussi de mieux répercuter les gains de productivité sur les salaires. Renforcer les compétences est également essentiel parce qu’une main-d’œuvre qualifiée est moins facile à remplacer par de nouvelles technologies. Des politiques actives du marché du travail et des politiques de formation axées sur les compétences sont aussi clés pour aider ceux qui courent le risque d’être exclus du marché du travail.

Certaines décisions des pouvoirs publics renforcent les vents contraires qui soufflent sur nos économies. Aujourd’hui plus que jamais, nous avons besoin de meilleures politiques, qui reposent sur la coopération, la confiance et l’ouverture, pour pouvoir créer des emplois, pérenniser la croissance et relever les niveaux de vie.

Éditorial extrait des Perspectives Économique de l’OCDE, Novembre 2018

References

OECD (2018), Perspectives économiques de l’OCDE, OECD Publishing, Paris.

 



Growth has peaked: Challenges in engineering a soft landing

Category: Economic outlook,Euro Area,European Union,Uncategorized
written by oecdecoscope | November 22, 2018

by Laurence Boone, OECD Chief Economist

EO-nov-2018-cover-enThe global economy is navigating rough seas. Global GDP growth is strong but has peaked. In many countries unemployment is well below pre-crisis levels, labour shortages are biting and inflation remains tepid. Yet, global trade and investment have been slowing on the back of increases in bilateral tariffs while many emerging market economies are experiencing capital outflows and a weakening of their currencies. The global economy looks set for a soft landing, with global GDP growth projected to slow from 3.7% in 2018 to 3.5% in 2019-20. However, downside risks abound and policy makers will have to steer their economies carefully towards sustainable, albeit slower, GDP growth.

Engineering soft landings has always been a delicate exercise and is especially challenging today. As central banks progressively, and appropriately, reduce their liquidity support, markets have started repricing risks as reflected by the return of volatility and the decline of some asset prices. Capital flows, which had fuelled the expansion of emerging market economies, have been reversing towards advanced economies and especially the United States. Trade tensions have heightened uncertainty for businesses and risk disrupting global value chains and investment, especially in regions tightly linked to the United States and China. Political and geopolitical uncertainty has increased in Europe and the Middle East.

An accumulation of risks could create the conditions for a harder-than-expected landing. First, further trade tensions would take a toll on trade and GDP growth, generating even more uncertainty for business plans and investment. Second, tightening financial conditions could accelerate capital outflows from emerging market economies and depress demand further. Third, a sharp slowdown in China would hit emerging market economies, but also advanced economies if the demand shock in China triggered a significant decline in global equity prices and higher global risk premia.

Political tensions other than trade have also grown. In the Middle East and Venezuela, geopolitical and political challenges have translated into more volatile oil prices. In Europe, Brexit is an important source of political uncertainty. It is imperative that the European Union and the United Kingdom manage to strike a deal that maintains the closest possible relationship between the parties. In some euro area countries, the exposure of banks to their government debt could weigh on credit growth if risk premia were to increase further, with dampening effects on consumption, investment, GDP growth, and ultimately jobs.

Against this backdrop, we urge policymakers to restore confidence in international dialogue and institutions. This would help strengthen trade discussions in order to tackle critical new issues and to address concerns with the rules and processes of the existing trading system. Concrete action at the G20 level will send a positive signal and help demonstrate that countries can act in a coordinated and cooperative fashion should growth slow more sharply than envisaged.

It is all the more important to cooperate now that policymakers have limited margins for manoeuvre in case of an abrupt slowdown. In some countries, monetary policy is still very accommodative, while public and private debt-to-GDP ratios are historically high. Fiscal stimulus will be scaled back, which is appropriate. But in the event of a downturn, governments should leverage low interest rates to coordinate a fiscal stimulus. In this Economic Outlook, we report simulations showing that a coordinated fiscal stimulus at the global level would be an effective means of quickly responding to a sharper-than-expected global slowdown.

The fragile environment heightens the importance of completing European Monetary Union, as suggested in the latest OECD Economic Survey of the Euro Area. It is urgent for Europe to complete the banking union. The lack of progress has led to higher domestic sovereign debt holdings by banks in some countries, magnifying hazards and maintaining the redenomination risk that undermines confidence. Progress towards establishing a common fiscal capacity would help maintain confidence in the ability of the euro area to react to shocks and sustain growth.

The global recovery since the financial crisis has not led to tangible improvements in the standards of living of many people. While absolute poverty has plummeted in a number of emerging market economies, the crisis exposed decades of widening well-being gaps between the higher-skilled mobile part of the population and a larger number of less mobile, often less-skilled people in many advanced economies. Income gaps pass from one generation to the next: one’s future prospects are framed by where one is born, educated and starts looking for a job. These entrenched inequalities threaten growth, intergenerational mobility, and fuel discontent with the integrated global economy, which has brought prosperity across large parts of the world.

The general slowdown in productivity growth in many economies constrains real wage growth. But even in highly productive firms, wage growth has been more sluggish than expected, a result in part of technology driving down investment prices. This can prompt substitution of labour by capital, particularly for low-skilled, high-routine jobs. As digitalisation deepens, the divide between high-skill, low-routine jobs and low-skill, highroutine work risks widening. In addition, slower business dynamics preserve firms which are less productive and accordingly are less able to increase wages.Together with declining redistribution, this trend risks fuelling inequalities.

Governments can do more to foster higher productivity and wages. Strengthening product market competition would not only favour wider diffusion of new technologies, thereby raising productivity growth, but also help transfer productivity gains to wages. Investment in skills can help workers seize the gains from technological progress as higher-skilled labour is less easily replaced by new technologies. Effective active labour market and skills training policies can help those at risk of being excluded from the labour market.

Certain policy decisions are exacerbating many of the headwinds faced by our economies. Better policies, built on greater trust and openness, are needed now more than ever in order to create jobs, sustain growth and raise living standards.

Editorial from the November 2018 edition of the Economic Outlook

References:

OECD (2018), OECD Economic Outlook, Volume 2018 Issue 2: Preliminary version, OECD Publishing, Paris, https://doi.org/10.1787/eco_outlook-v2018-2-en.



Making trade and digitalisation work for all

Category: Inequality,trade,Uncategorized
written by oecdecoscope | November 22, 2018

by Laurence Boone, OECD Chief Economist

IncgrowthblogLB12-11-2018For some, the financial crisis was an eye-opener exposing the inequalities in life chances between those with the right skills and those without, between those born and educated in the right places and those who were not.  But for many others the growing gap in well-being has been a reality for decades.

Widening inequalities threaten economic growth, undermine trust in government and democracy, and fuel discontent with the multilateral rules-based system of market economies.

Governments can and should seek to reverse the trend towards growing inequality and ensure that  economic growth benefits everyone. Making trade and digitalisation work for all is not about idealism: it is about improving people’s standard of living, boosting opportunities for inter-generational mobility and ensuring a brighter future for all.

The OECD has developed a whole-of-government approach, built around analysis of policies and strategies to ensure that the fruits of economic growth are better shared across society. We identify comprehensive policy packages that optimise gains in GDP and households incomes, including among the less well off.

There are no one-size-fits-all reform packages, but key principles can guide policy-making for inclusive growth by targeting three broad areas for action: firms, skills and workers.

  • Firms: to promote business dynamism and the diffusion of knowledge by, for instance, lowering barriers to market entry or improving the efficiency of the corporate tax system.
  • Skills: by fostering higher quality education and greater innovation and through better-adapted R&D policies so that innovation fosters productivity gains across all types of activities.
  • Workers: with policies that ensure workers benefit from a fast-evolving labour market, including those who are most vulnerable to the changing demand for skills and automation, or who have less bargaining power.

The principles build on extensive OECD empirical research into the effects of pro-growth structural policy reforms on household disposable incomes. This research highlights the trade-offs between productivity gains and inequality when they appear, as well as possible synergies between efficiency and equity.

The policies needed to raise equality of opportunity are clear. It is striking that a child whose parents did not graduate from secondary school has only a 15% chance of doing so himself or herself, compared to a 65% chance for more well-off children.  Equality of opportunities can foster social mobility: an equal access to education, finance, jobs, health, transport and other public services helps compensate for the environment in which people were born. Good quality education is primordial throughout life – especially early childhood education, but also training at work, which too often benefits those already well educated.

Other reforms have more ambiguous effects on efficiency and equity. Policies which reduce labour costs by lowering unemployment benefits increase employment, but also make the vulnerable more fragile when there is an economic downturn. Meeting the twin objectives of raising employment while mitigating the negative consequences on poor households requires well-targeted active labour market policies to enhance the employability of low-skilled workers, the long-term unemployed and discouraged job seekers.

Some policies have more ambiguous effects: raising the minimum wage reduces inequality, just as stronger unions may strengthen workers’ bargaining position.  When firms have the option of investing in automation technology,  striking the right balance between bargaining power and the economic environment is  crucial to preserving employment with appropriate wage gains.

Spurring productivity, by easing barriers to firm entry and competition in product markets, supports GDP growth gains without exacerbating inequality, but only to the extent that the associated job gains are fairly equally shared across households. This requires the distributional effects of higher employment – which tends to benefit the less affluent households disproportionately – to more than offset those of higher labour productivity, which tends to benefit  the wealthiest households.

Inclusive growth also requires devoting careful attention to transition. Opening markets to trade or progress in technology inevitably leads to the decline of certain companies and obsolescence of particular skills. Accompanying measures – building on an active partnership between employers and governments, often at the regional level – can help workers and strengthen trust in the protective capacity of governments. Safety net packages and trampoline policies for keeping workers in the labour markets are all relevant. For example, in Sweden, job security councils, founded by employers, assist workers whose employment is put at risk when firms restructure. The programmes have enabled  85% of displaced workers to find a new job within a year, a higher rate than any other OECD country. Conversely, the US Trade Adjustment Assistance and the EU Globalisation Adjustment Fund, which lack such partnerships, have barely benefitted those affected by the displacement of economic activities.

It is important to acknowledge that transitional policy responses have limits. This is especially the case for persistent shocks concentrated in specific regions, sectors or skills. When distributional effects are persistent, direct fiscal policy measures may be needed to restore equity and opportunity. These may include well-designed wealth and inheritance taxation, paying particular attention to the progressivity of the tax system, and better targeting social benefits towards those who need those most. Separately at the global level, the international  programme to tackle Base Erosion and Profit Shifting (BEPS) and increase information transparency of the tax system will help strengthen the level-playing field and ensure a fair share of firms’ revenues is allocated to where value added is produced. This will help stabilise government revenues and ensure redistribution  benefits to those who need it most, but perhaps more importantly may help increase trust in multilateral cooperation.

Sustained growth is a pre-condition for improving living standards and job creation, but sustainability depends on an effective and perceived broad sharing of the growth dividends. The OECD has been promoting an inclusive growth framework based on three pillars: equal opportunities, business dynamism and inclusive labour markets, efficient and responsive governments. Implementation needs to start today.

References:

 



Fostering formal sector job creation to further improve living standards in Indonesia

Category: Indonesia,Labour markets,Uncategorized
written by oecdecoscope | November 22, 2018

By Christine Lewis, Head of Indonesia Desk, OECD Economics Department

The Indonesian economy has grown solidly in recent years, which together with helpful government policies has raised incomes and brought down poverty rates to record lows, as highlighted in the latest OECD Economic Survey of Indonesia (OECD, 2018). Prudent macroeconomic policies have contributed to economic stability, muted inflation and limited government debt. Even with the more challenging external environment, GDP growth is expected to remain around 5¼ per cent in 2018 and 2019.

Indonesia’s youthful population represents an opportunity to lift future growth and living standards. In contrast with higher-income countries, the working-age population share is rising and will likely continue doing so for another decade (United Nations, 2017). OECD estimates suggest that over the next decade this demographic change alone is expected to boost trend GDP growth by around 0.3% on average (OECD, 2018; Guillemette and Turner, 2018).

Indonesia’s favourable demographics could provide a bigger boost to growth if a larger share of employment consisted of high-quality jobs in the formal sector. Informality is usually associated with insecure jobs with lower pay and fewer training opportunities (OECD, 2015; Allen, 2016). Although the rate of informality has fallen in Indonesia, it remains pervasive. The OECD estimates that around half of all dependent employees and 70% of all workers are informally employed, compared to 35% in Brazil or around 55% in Colombia (Figure 1). Growing the share of formal sector jobs would increase incomes and, by raising government revenues, would allow better services to be provided for future generations.

Indo CLewis informality 1

There are different reasons for informal employment so tackling it requires a multi-pronged approach. Stringent employment regulations, including high dismissal costs and minimum wages, limit firms’ ability and incentive to hire formal employees (Figure 2). The Survey recommends trialling easier employment regulations and a discounted wage for youth in special economic zones and extending these reforms if they are successful. Continuing to simplify business regulations and to improve the new online submission system for licensing would help reduce barriers to businesses operating formally.

Indo CLewis informality 2-2018

Low skill levels combined with a relatively high minimum wage also limit the growth of formal sector employment. Only half of all Indonesians aged 25-35 have completed upper secondary school. The OECD PISA test results show that many 15 year-olds still lack basic skills in maths and reading. Improving the quality of education can be difficult but it is crucial for improving the prospects of future generations. Reforms should focus on improving teacher quality in schools and better linking vocational education with employers to ensure students graduate with the skills they need to find good jobs and continue developing over their career.

References

Allen, E. (2016), “Analysis of trends and challenges in the Indonesian labor market”, ADB Papers on Indonesia, No. 16, Asian Development Bank, Manila.

Guillemette, Y. and D. Turner (2018), “The long view: scenarios for the world economy to 2060”, OECD Economic Policy Papers, No. 22, OECD Publishing, Paris, http://dx.doi.org/10.1787/b4f4e03e-en.

OECD (2018), OECD Economic Surveys: Indonesia, OECD Publishing, Paris, https://doi.org/10.1787/eco_surveys-idn-2018-en.

OECD (2015), “Enhancing job quality in emerging economies”, in OECD Employment Outlook 2015, OECD Publishing, Paris, http://dx.doi.org/10.1787/empl_outlook-201h5-9-en.

United Nations (2017), World Population Prospects: The 2017 Revision, DVD Edition;



If potential output estimates are too cyclical, then OECD estimates have an edge

Category: Economic outlook,Uncategorized
written by oecdecoscope | November 22, 2018

by Yvan Guillemette and Thomas Chalaux, OECD Economics Department

To assess the cyclical position of an economy, macroeconomists use a concept called potential output, which measures the economy’s production rate that is consistent with stable inflation at the target. When actual output is below potential, the ‘output gap’ is negative, the economy is depressed and, without prompt intervention by the central bank, inflation would tend to sag below target. Conversely, a positive output gap indicates an overheating economy and portends price and wage pressures, signalling the need for tighter monetary policy.

A country’s output gap is also a crucial ingredient in the estimation of the structural budget balance, which serves to assess the impulse that fiscal policy is imparting on the economy. Since the 2005 reform to the European Union’s fiscal framework, the Stability and Growth Pact, the structural budget balance has been at the centre of assessments by the European Commission of member countries’ adherence to the Union’s fiscal rules.

The difficulty is that potential output, and measures derived from it, such as the output gap and the structural budget balance, are not directly observable but must be estimated. The objective is for potential output to capture structural changes in the economy, such as a declining working-age population associated with ageing, while letting cyclical fluctuations, which are expected to be temporary, flow through to the output gap measure. Potential output estimation is therefore largely a matter of separating out cyclical fluctuations from structural changes. Three international organisations routinely produce such estimates for their member countries: the European Commission (EC), the International Monetary Fund (IMF) and the OECD. Despite using broadly similar methods, differences arise from a number of methodological and judgemental choices.

It is difficult to assess the quality of potential output estimates because there are no ‘true’ observed values to compare them to. Nevertheless, one criticism increasingly levelled against such estimates is that they treat too much of regular economic fluctuations as being structural. Estimated potential growth tends to be too weak when the economy is weak and vice-versa. In other words, potential output estimates are excessively ‘pro-cyclical’. One consequence is that governments will tend to have a pessimistic view of the structural budget balance in bad times and, conversely, an optimistic view in good times. Too much procyclicality in potential output therefore encourages procyclicality in fiscal policy, whereas economists generally agree that fiscal policy should be countercyclical.

For instance, the economists Antonio Fatás and Lawrence Summers have argued that the financial and economic crisis of 2008 created an overly pessimistic view of potential output among policy makers, which led them to support contractionary fiscal policy (i.e. cuts in spending or increase in taxes). Fiscal austerity affected economies negatively by subtracting a vital source of demand and, via hysteresis effects, caused a reduction in potential output that not only validated the original pessimistic assessment, but also led to a second round of fiscal consolidation. As Fatás says, this succession of contractionary fiscal policies was likely self-defeating for many European countries in the sense that their public debt-to-GDP ratios are barely better today than when austerity measures started.

A simple measure of the cyclicality of potential output series can be obtained by regressing the annual change in estimated potential growth on a constant and the annual change in actual growth. The estimated coefficient on actual growth then measures the sensitivity of potential growth to actual growth. Intuitively, this measure should be positive but small.

The chart below reports the result of this exercise for potential output estimates published by the three aforementioned institutions as part of their spring 2018 forecasting rounds, using a common panel of 24 countries over the 1980-to-2017 period. Each regression uses 682 observations, so an average of 28 years per country.

OECD estimates yvan

The results show clearly that the spring 2018 European Commission potential output series were the most cyclical. On average in the Commission estimates, a one-percentage point change in actual real GDP growth is associated with a 0.18 percentage point change in potential growth. The coefficient on the IMF estimates is only slightly smaller. On the other hand, the OECD coefficient is less than half of the two others. One reason the OECD potential output measure may be less cyclical is that before smoothing them with a filter, the component series used to construct potential output are first cyclically adjusted by making use of other variables – such as survey measures of capacity utilisation or the investment rate – which are known to be correlated with the cycle (see Turner et al., 2016).

The above exercise does not use ‘real-time’ estimates of potential output so, for instance, the 2010 potential growth estimate for France is different now than it was back in 2010. The 2010 estimate was of course the relevant one for the conduct of policy at the time. Rather, the test assesses the amount of cyclicality inherent in current methodologies, which may also have evolved since 2010. And if current estimates for past years are considered too sensitive to actual growth, then it is likely that the real-time estimates being produced now with a given methodology are too sensitive as well.

The sensitivity of changes to potential growth to changes in actual growth rates is neither a perfect nor a comprehensive measure of the quality and reliability of potential output estimates. After all, simply using a fixed number for a country’s potential growth would show a zero correlation but would obviously be problematic. However, in the absence of other obvious flaws, the OECD potential output estimates appear less exposed to the procyclicality criticism than those of the EC or IMF.

References

Coibion, O., Y. Gorodnichenko and M. Ulate (2017), “The Cyclical Sensitivity in Estimates of Potential Output”, NBER Working Papers, No. 23580, National Bureau of Economic Research.

Fatás, A. (2018). “Fiscal Policy, Potential Output and the Shifting Goalposts”, CEPR Discussion Papers, No. 13149, Centre for Economic Policy Research.

Fatás, A. and L.H. Summers (2018), “The permanent effects of fiscal consolidations”, Journal of International Economics, Vol. 112, pp. 238–250.

Turner, D. et al. (2016), “An investigation into improving the real-time reliability of OECD output gap estimates”, OECD Economics Department Working Papers, No. 1294, OECD Publishing, Paris.



How best to keep up rapid tourism growth in Indonesia

Category: Indonesia,Uncategorized
written by oecdecoscope | November 22, 2018

by Patrice Ollivaud, Economist, Indonesia Desk, OECD Economics Department

Bali, where the 2018 OECD Economic Survey of Indonesia is being released, is emblematic of Indonesia’s success in creating a popular tourism brand. The number of foreign tourists arriving in Bali soared from 2.5 million in 2010 to 5.7 million in 2017. In 2014, the authorities committed to replicate this success in “10 new Balis” with the aim of doubling tourist numbers to 20 million by 2019. To reach that target, the government accelerated transport infrastructure development and stepped up its promotion efforts. In 2017, tourist arrivals reached 14 million and other destinations are becoming popular, such as Borobudur.

tourism bali

However, success in numbers also poses challenges. Environmental infrastructure such as water and waste treatment remains insufficient in most of Indonesia. Growing numbers of foreign tourists are widening the infrastructure gap because their consumption is higher than that of a typical Indonesian. To wit, the increased use of plastic bottles, since tap water is typically not potable. Improperly disposed waste from land largely contributes to Indonesia’s position as the second-largest contributor to plastic marine pollution in the world. Indonesia has also the most plastic-ridden coral reefs in the Asia-Pacific (Lamb et al., 2018). In Bali, the ocean carries waste onto beaches that need to be regularly cleaned.

Addressing infrastructure gaps would allow more sustainable development of tourism, and development of tourism to be sustained. Better planning, especially at the destination level, can help accommodate tourist inflows (OECD, 2018). Focusing more on attracting high-spending visitors could also limit the burden without reducing the economic benefits. The involvement of local government and stakeholders is crucial so that plans address local needs and have the population’s acceptance.

Preserving the environment and developing tourism can be mutually reinforcing. Visitors are attracted by the richness of Indonesia’s environmental assets. Preservation of those assets is essential for sustaining Indonesia’s brand and attracting tourists. For example, forests need protection as deforestation is destroying more than just trees and wildlife but also the economic returns from properly using them for tourism. Protecting more areas would contribute to preserving those assets (OECD, 2018). More of those areas could also be opened to the tourism industry, when it is environmentally viable. Imposing fees will help control the number of visitors and contribute to the cost of maintenance.

References

Lamb, J. et al. (2018), “Plastic waste associated with disease on coral reefs”, Science, Vol. 359/6374, pp. 460-462.

OECD (2018), OECD Economic Surveys: Indonesia 2018, OECD Publishing, Paris.



Making the most of Riga metropolitan area can boost wellbeing and economic growth in Latvia

Category: Latvia,Uncategorized
written by oecdecoscope | November 22, 2018

By Daniela Glocker and Andrés Fuentes Hutfilter, OECD Economics Department

Located at the centre of the Baltic States, Latvia’s capital city Riga and its surrounding municipalities are a strategically important logistic centre with access to markets in Europe and Russia. It is the largest city in the Baltic States and the third largest in the Region of the Baltic Sea.The city and its surrounding municipalities are not only home to more than half of the Latvian population but also contribute about 69% to national GDP.  Better urban policies improve the quality of life for a large share of the population,  boost economic performance by making the area more attractive, and can help retain young people who have emigrated from Latvia in large numbers, as argued in the 2017 Economic Survey of Latvia (OECD, 2017).

The city of Riga has lost inhabitants mostly to surrounding suburban municipalities in commuting distance, resulting in urban sprawl. Urban sprawl is driven by low density developments. It can give rise to socio-economic, transport, infrastructure and environmental concerns, with negative effects on economic performance and quality of life. Urban sprawl therefore increasingly contributes to congested roads and environmental pollution. For instance, between 2000 and 2010 the number of private vehicles in Riga increased by 60%, whereas the flow of incoming vehicles from surrounding areas of Riga doubled.

Riga Fuentes

Urban sprawl is driven by middle to high income households, contributing to a concentration of households with similar socio-economic status in neigbourhoods. Residential segregation can result in unequal access to quality education. Residential segregation in Riga is still lower than in other European capital cities but has been increasing. Latvia’s fiscal framework incentivises municipalities to follow a strategy that maximises their revenues by individually adjusting their spatial planning. This is because high income households generate more local tax revenues. Municipalities may lack incentives to provide amenities that might attract lower income households, such as social housing. While there is redistribution of tax revenue across municipalities, it only offsets a small part of the revenue differences.

To reap the benefits that come with urban agglomeration, Riga city and the surrounding municipalities need better co-ordination and joint strategic planning. The appropriate scale of such metropolitan governance needs to match daily mobility patterns of residents and ensure good co-ordination not only across local but also regional and national governments as well as across policy sectors (OECD, 2015a). Across the OECD, good metropolitan governance has shown to be linked to higher productivity, durably higher wages and better quality of life (Ahrend et al., 2014; OECD, 2015b). For example, residents’ satisfaction with public transport in metropolitan areas with a dedicated transport authority is higher and air pollution is lower. Metropolitan areas without tailor-made governance arrangements have experienced an increase in urban sprawl, whereas those with a metropolitan authority densified.

References

Ahrend, R., C. Gamper and A. Schumann (2014), “The OECD Metropolitan Governance Survey: A quantitative description of governance structures in large urban agglomerations”, OECD Regional Development Working Papers, Paris, http://dx.doi.org/http://dx.doi.org/10.1787/5jz43zldh08p-en.

OECD (2017), Economic Survey of Latvia, OECD Publishing, Paris.

OECD (2015a), Governing the City, OECD Publishing, Paris, https://doi.org/10.1787/9789264226500-en.

OECD (2015b), The Metropolitan Century: Understanding Urbanisation and Its Consequences, OECD Publishing, Paris, http://dx.doi.org/10.1787/9789264228733-en.



High uncertainty is weighing on global growth

Category: Economic outlook,Uncategorized
written by oecdecoscope | November 22, 2018

By Laurence Boone, OECD Chief Economist

Less than 6 months ago, the global economy enjoyed healthy synchronised growth. Now, the landscape has changed. Global growth is hitting a plateau, uncertainties over the path forward abound, and risks from trade restrictions and tighter financial conditions have already started to materialise in some countries.

Global growth is projected to be at 3.7% in 2018 and 2019 in our latest Interim Economic Outlook, which remains an elevated pace. At the same time, it also reflects weaker prospects than anticipated just a few months ago, and some fragilities. Growth performance has become less synchronised across the world: while it remains strong in the United States, India and China, it has faltered in many other economies. Unemployment has continued to decline and is now below its pre-crisis level in the OECD, but wage growth remains persistently weak, raising uncertainties about how much spare capacity remains in the labour market. In other words, many workers would like to work more hours in Europe, or have left the labour force in the United States, fueling poor well-being perceptions.

GDP projections 20-08-2018

More worryingly, risks – trade, emerging economies’ sensitivity to tightening financial conditions, politics, finance – are intensifying, casting shadows over the outlook for the coming months and years.

The consequences of rising trade restrictions are already visible. World trade in goods has markedly slowed in recent months, with acute impacts in the sectors directly targeted. For instance, the prices of washing machines for US consumers jumped by 20% between March and July this year after the imposition of tariffs. US imports of steel from China are sharply down, just like Chinese imports of cars from the US. Down the line, higher tariffs mean higher prices for consumers, less investment and less jobs for workers, and ultimately losses in productivity and standards of living. Just consider that 13 million jobs in the US and 8 million in Japan depend, directly or indirectly, on foreign consumption.

Jobs dependent 20-09-2018

Another risk that has started to dent growth is, in emerging market economies (EMEs), the effect of rising interest rates and US dollar appreciation. Argentina and Turkey, having significant shares of debt in foreign currency, large external financing needs and high domestic inflation, have been the most exposed to turbulence in currency markets. Other EMEs with high foreign reserves, credible monetary frameworks and prudent fiscal policies, are better equipped to withstand shifts in investors sentiment that are unavoidable as monetary policy normalises around the world. Floating exchange rates have played their cushioning role which has limited contagion so far, but measures to ensure persistent macroeconomic policy credibility and resilience in more vulnerable economies are essential to safeguard financial stability.

In Europe, political risks could harm growth and social cohesion. Brexit is an obvious source of uncertainty. It is vital that a deal is struck that maintains the closest possible relationship between the United Kingdom and the European Union. As for Italy, public finances need to respect EU rules, ensure debt sustainability while privileging productive investments badly needed to raise growth. More largely, the EMU policy framework needs to be strengthened along the commitment made in the wake of the euro area crisis to enhance confidence, growth and ensure the euro area thrives as it should.

As we mark the tenth anniversary of the financial crisis, there is no denying that some lessons have been learned: banks are now better capitalised, and financial regulation has been stepped up thanks to a large extent to international coordination. But in other areas, financial risks have built up again. Debt has reached unprecedented highs, particularly in the public sector and for corporate debt. Less regulated shadow banking has expanded rapidly. In some countries, equity prices and housing markets are further cause for concern.

In light of the many risks, what should policymakers do?

The immediate priority is to preserve business confidence and investment by reducing policy uncertainty – including by restoring international dialogue to avoid the escalation of trade restrictions. Enhancing resilience is also key in the financial sector as well as, in the case of Europe, by completing the banking union launched in 2012.

In case risks materialise further, there is little space left for monetary policy to react in advanced economies. This makes it all the more important for countries currently enjoying strong growth not to widen fiscal deficits to support an already vibrant consumption, but instead to rebuild room for manoeuvre for those which lack it, and expand public investment to shore up the foundations for sustained growth for all.

At the same time, to foster thriving societies and provide a durable response to political tensions, structural policies should focus on ensuring all people have access to better opportunities. In the long term, the keys to healthy productivity gains and growth that benefits all lie in quality education, from early childhood to lifelong learning, and in offering  better support for all workers to find good and fulfilling jobs. This is vital to reduce political uncertainty in a sustainable manner.

Reference

OECD Interim Economic Outlook, September 2018.