OECD raises global economic growth forecast for 2018

The world economy will grow 3.7% next year, the Organisation for Economic Cooperation and Development said, raising June expectations by 0.1 percentage point on a stronger-than-expected performance in the eurozone, Japan and Russia.

The forecast for 2017 was unchanged at 3.5%. Both remain below the 4% "cruising speed" the OECD would like to see, its Chief Economist Catherine L. Mann told a news conference in Paris on Wednesday.

"Strong and sustained medium-term global growth in not yet secured," the OECD said in its interim economic outlook. "The recovery of business investment and trade remains weaker than needed to sustain healthy productivity growth. Wage growth has been disappointing, keeping inflation at low levels. Strong future growth in emerging market economies will depend on deeper reform."

Global economic expansion was 3.1% last year.

Eurozone growth in the first half of this year outpaced expectations and became more broad-based across countries, the OECD said. It cited a 9.1% unemployment rate in July, the lowest since 2009, stronger consumption growth, firmer investment and a "healthy" increase in exports.

Any drag from a stronger euro -- the currency has risen 14% against the dollar in the year to date, according to Bloomberg data -- are "expected to be modest," the OECD said.

Balancing challenge

Central banks face a "balancing challenge" with their monetary policies; to ensure economic recovery is sustained and to restrain financial vulnerabilities, the OECD said.

The European Central Bank (ECB) has been using quantitative easing (QE) to try bring eurozone inflation to its target of below but close to 2%. It works by the bank buying bonds from banks -- currently at €60 billion a month -- to bring money into the financial system and take interest rates down.

Consumers and businesses can thereby borrow more at lower costs, and their spending and investments should increase. That, according to the ECB, should take inflation nearer to 2%. The US Federal Reserve has also followed a programme of QE.

"The ECB should follow through with its plan to gradually taper asset purchases before phasing out the negative interest rate policy," the OECD said. "The Federal Reserve should continue with a gradual increase in policy rates and soon start reducing its balance sheet, provided spare capacity in the labour market continues to shrink and inflation approaches the target" of 2%.

ECB President Mario Draghi said on September 7 that the "bulk" of the decisions about phasing out QE will be taken in October.  Janet Yellen, his opposite number at the Federal Reserve,  may announce a start date for the gradual unwinding of the US central bank’s $4.5 trillion balance sheet, Bloomberg reported.

Government spending 

In the wake of the global financial crisis -- marked by the collapse of Lehman Brothers, the fourth-largest US investment bank, nine years ago -- governments introduced "drastic" cuts to items that boost sustainable growth, such as education, infrastructure, family benefits and health investments, the OECD said.

That must change, the organisation said.

"The mix of tax and spending policies in each economy should be improved to ensure that they are more supportive and inclusive of sustainable growth," it said. "Priority should be given to public spending that yields the highest benefits for growth inclusiveness and long-run supply."

The 35-nation OECD provides a forum in which governments can work together to share experiences and solve common problems. 

(Alistair Holloway, alistair.holloway@wort.lu, +352 49 93 739)