OECD warns protectionist rhetoric undermining investment rebound

PARIS • The OECD warned world leaders that protectionist politics risk undermining an investment recovery that has the global economy improving without showing real acceleration.

World output is set to expand by 3.5% this year — more than the 3.3% predicted at the beginning of March and up from 3% last year, the Paris-based Organisation for Economic Cooperation and Development (OECD) said yesterday in a report. The outlook for 2018 was un- changed at 3.6% growth.

“Investment has been a missing support for global growth, trade, productivity and real wages,” OECD chief economist Catherine Mann wrote in the report.

While improving demand and strong competition policies are helping change that, “protectionist policies in Group of 20 (G-20) countries and anti-globalisation rhetoric” are creating “reservations” among investors.

Doubt about the benefits of world trade has moved from the margins to the centre of the global political conversation since voters put Donald Trump in the White House and opted last year to pull Britain out of the European Union.

At a meeting in Sicily two weeks ago, G-7 leaders watered down their traditional defence of open markets at the behest of President Trump, saying only that trade needs to be “free, fair and mutually beneficial”. They will resume the discussion at a meeting of the larger G-20 in Hamburg in July.

The financial and economic consequences of the debate are potentially high.

“Geopolitical shocks and trade protectionism could 
catalyse snap-backs in asset prices and realise downside risks through a variety of channels,” Mann wrote. “Global equity prices have increased, reaching historic highs in the US and Germany, despite little upward revision to gross domestic product (GDP) growth and inflation.”

The S&P 500 Index of US equities is up 15% in the past year. Germany’s DAX Index is up 23%.

US GDP, meanwhile, is set 
to expand 2.1% this year and 2.4% in 2018, the OECD said yesterday. That compares to forecasts of 2.4% and 2.8% growth made by the organisation at the beginning of March.

Euro-area growth is seen as even more tepid at 1.8% both this year and next, according to a report. That compares to the 1.6% predicted in early March.

“Monetary policy is appropriately moving toward a more neutral stance in the US”, while central banks in Europe and Japan are using forward guidance, Mann said.

“These actions and words help investors to assess policy risks, to bring asset price 
valuations into alignment 
with economic fundamentals,” she added.

China’s economy will hold up this year and next, but challenges remain as the nation performs a balancing act, according to the OECD.

Expansion is buoyed by accelerating infrastructure investment tied to regional integration plans and the Belt and Road initiative, its report said yesterday. Consumption growth will remain stable and recovering global demand will support exports. — Bloomberg