Cheap money, oil fuel improvement in global growth outlook — OECD

PARIS — Cheap oil and money have lifted the eurozone out of lethargy, the Organisation for Economic Cooperation and Development (OECD) said Wednesday, but it warned investment was lacking to achieve rapid world growth and expressed concerns about China.

“Growth prospects in the major economies look slightly better” than when it made its previous forecasts in November, the OECD said.

It raised its forecast for global growth this year by a tenth of a percentage point to 4 per cent and its outlook for 2016 by two tenths of a percentage point to 4.3 per cent.

Nevertheless, the OECD indicated that “the near-term outlook remains for moderate, rather than rapid, world gross domestic product growth”, pointing out that “real investment remains sluggish, and labour is not yet fully engaged”.

The OECD, a policy analysis body made up of 34 countries with advanced economies, said the effects of “lower oil prices and the effects of monetary policy easing are driving the overall improvement in the outlook”.

Nowhere was this more evident than in the eurozone, where the OECD raised its 2015 growth forecast by 0.3 points to 1.4 per cent this year and by the same magnitude to 2 per cent in 2016.

The European Central Bank’s (ECB) launching of a 1.14 euro ($1.2 billion) bond buying programme this month was the main reason for the improvement in the outlook in the eurozone, it said.

The OECD noted that monetary conditions have been eased in recent months in countries accounting for roughly half of the global economy, which it said has helped improve financial conditions.

With the Federal Reserve (Fed) meeting on Wednesday and economists on the lookout for signals that it could begin raising interest rates within months, the OECD said it should wait. 

“Lower oil prices and the appreciation of the dollar make it appropriate for the Federal Reserve to wait longer to raise policy interest rates,” said the OECD.

The dollar has been quickly rising in value as the Fed nears raising interest rates and the ECB has eased monetary policy, which could slow US exports and growth. 

The OECD held its forecasts for US growth steady at 3.1 per cent this year and 3 per cent in 2016.

India heads the pack 

Meanwhile, growth is “getting back on track” in Japan, said the OECD, which lifted its 2015 forecast by 0.2 points to 1 per cent growth and the 2016 outlook by 0.4 points to 1.4 per cent.

While lower fuel prices mean it will take longer to return to safe inflation levels, it will support demand, added the OECD as it pointed to higher wages as being a key part to a sustainable recovery.

“A key requirement for reaching a new equilibrium with satisfactory demand growth and inflation close to the official target is a significant rise in average nominal wages, making the upcoming annual wage bargaining round a critical period,” indicated the OECD, which also urged further structural reforms.

The OECD said China’s growth is slowing to the government’s target of 7 per cent, as it trimmed its forecast by 0.1 point to that level while the 2016 outlook was left untouched.

“Policy makers face a significant challenge between meeting growth targets while also pursuing the stated goal of rebalancing the economy toward domestic demand and at the same time ensuring that financial risks are managed,” it warned.

Meanwhile, the OECD now expects India to overtake China as the fastest-growing major economy, hiking its forecast by 1.7 points to 7.7 per cent growth in 2015, although part of the change was due to new data. The 2016 forecast was raised to 8 per cent.

Commodity exporters, like Canada and Brazil, saw their growth outlooks cut as oil prices have fallen. 

Brazil’s forecast was chopped by 2 points to a contraction of 0.5 per cent this year, as a tight monetary policy has also crimped growth.

Despite growing risks of ultra-low interest rates laying the groundwork for a new crisis, the OECD said central banks should continue their easy money policies although governments need to act to ensure the recoveries are balanced and create jobs.

“... the failure of monetary easing alone to spur strong growth in fixed investment, with instead booms in financial investments, imply that policy makers cannot rely exclusively on monetary policy,” the OECD concluded.