Investment and the B- global

economy: how to get a better ‘grade’

Paris, 3rd June 2015

10h20 Paris time

Catherine L. Mann OECD Chief Economist

Release of the June 2015

OECD Economic Outlook

Key messages

Global growth improving, but still moderate – the B- world economy could do better

Monetary easing (accompanied by currency depreciation in some countries), reduced fiscal drag and low oil prices underpin the projected improvement

Stronger investment is needed to strengthen demand, halt the slowdown in potential growth, improve diffusion of technology and increase employment

Balanced packages of mutually reinforcing monetary, fiscal and structural policies, undertaken collectively, are needed to get the strong, inclusive, sustainable growth that would earn the world economy an A

Global growth is projected to strengthen,

though remaining below long-run averages

Real GDP growth Per cent, seasonally adjusted annualised rate

Source: June 2015 Economic Outlook database.

Reduced fiscal drag—except Japan

Monetary easing—for 50% of global GDP

Currency depreciation—except US

Lower oil prices – adds 0.5% to level of global GDP

0

1

2

3

4

5

6

7

0

1

2

3

4

5

6

7

World OECD Non-OECD

1995-2007 average

Growth projections for 2015-16

GDP Volume, percentage change

June 2015 OECD Economic Outlook projections.

Column1 2014 2015 2016

World 3.3 3.1 3.8

United States 2.4 2.0 2.8

Euro area 0.9 1.4 2.1

Japan -0.1 0.7 1.4

China 7.4 6.8 6.7

India 7.2 6.9 7.6

Brazil 0.2 -0.8 1.1

Russia 0.6 -3.1 0.8

1. BRIIS comprises Brazil, India, Indonesia, Russia and South Africa, weighted by GDP at PPP exchange rates .

Source: November 2014 & June 2015 OECD Economic Outlook database.

Projected GDP growth, change between November 2014 and June 2015 Percentage points

Projections mostly revised down since

November Economic Outlook

-1.5 -1.0 -0.5 0.0 0.5 1.0 1.5

World

United States

Euro area

Japan

BRIIS

China

2015 2016

Upward revision Downward revision

1

Some of the downward revision reflects

pronounced weakness in Q1 2015

Real GDP growth Per cent, seasonally adjusted annualised rate

Source: June 2015 Economic Outlook database.

A further decline in China’s growth rate

Surprisingly sharp Q1 slowdown in the United States

Result: slower growth of the world economy than in any quarter since the crisis

-8

-4

0

4

8

12World United States China

Low oil prices will boost consumption

and investment in the major economies

.

Estimated effect of oil price decline since mid-2014 after two years if Brent

remains at USD 65 per barrel Impact on level of real GDP in 2016, per cent

Note: Simulation uses price difference of USD 20 per barrel relative to baseline in 2014Q3, USD 30 in 2014Q4, USD 40

in 2015Q1 and USD 35 from 2015Q2 onward.

Source: International Energy Agency; International Monetary Fund; and OECD calculations.

-1.2

-0.8

-0.4

0.0

0.4

0.8

1.2

-1.2

-0.8

-0.4

0.0

0.4

0.8

1.2

OECD netimporters

United States Non-OECD netimporters

World Non-OECD netexporters

OECD netexporters

Fiscal policy will exert less drag on growth

Change in underlying primary balance Per cent of potential output

Note: BRIICS are Brazil, China, India, Indonesia, Russia and South Africa.

Source: June 2015 OECD Economic Outlook database; IMF WEO database.

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

United States Euro area Japan OECD BRIICS

2012 2013 2014 2015 2016

Widespread monetary easing in recent

months is supportive for global demand

Source: OECD calculations.

Cumulative share of world GDP of countries whose central banks

have eased monetary policy since November 2014 Per cent

0

10

20

30

40

50

60

0

10

20

30

40

50

60

Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15

Depreciation has eased financial conditions

but worsened foreign currency debt exposure

Source: June 2015 OECD Economic Outlook database.

Bilateral nominal exchange rates

(USD/domestic currency)

Percentage change between July 2014 and May 2015

Real effective exchange rates

-35 -30 -25 -20 -15 -10 -5 0

United States

China

India

United Kingdom

Canada

Mexico

Japan

Euro area

Turkey

Brazil

Russia

-20 -15 -10 -5 0 5 10 15

United States

China

India

United Kingdom

Canada

Mexico

Japan

Euro area

Turkey

Brazil

Russia

Advanced economy labour markets are

healing, though the process is incomplete

Unemployment rate Per cent of labour force

Note: Real wages are nominal compensation per employee, deflated by corresponding CPI.

Source: June 2015 OECD Economic Outlook database.

Real wages Percentage change, seasonally adjusted

annualised rate

0

2

4

6

8

10

12

14

0

2

4

6

8

10

12

14

United States Euro area

Japan OECD -4

-3

-2

-1

0

1

2

3

4

-4

-3

-2

-1

0

1

2

3

4

United States Euro area Japan

Risks

Ordinary risks are balanced

Investment growth could again fail to accelerate, but capital spending by cash-rich companies could be stronger than projected.

Given uncertainty about the degree of labour market slack, wage growth in the US and Japan could be faster or slower than assumed.

The effect of monetary easing in the euro area and Japan could be either stronger or weaker than projected.

Oil prices could surprise on either side.

Economic Outlook forecast errors for GDP Percentage points

Note: Bars show the range of one-year-ahead forecast errors

over 10 Economic Outlooks from 2009 to 2013.

Source: June 2015 OECD Economic Outlook database.

-5

-4

-3

-2

-1

0

1

2

3

4

-5

-4

-3

-2

-1

0

1

2

3

4

OECD United States Euro area Japan

Average forecast error

… but there are a number of extraordinary risks

Overshooting of a rebound from exceptionally low advanced economy bond yields

Financial turmoil in emerging market economies

Unfavourable resolution of Greece’s situation

Sharp slowdown in China

Why the world economy only rates a “B-”

Labour market remains scarred

Long-term unemployed (more than one year)

Per cent of total unemployed1

1. Three-quarter moving averages, not seasonally adjusted.

2. Not in employment, education or training.

Source: OECD calculations based on quarterly national labour force surveys.

NEET2 rates among youth

Per cent of youth population aged 15-29

0

10

20

30

40

50

60

0

10

20

30

40

50

60

United States OECD Japan Euro area

Q4 2007 Q4 2014

0

5

10

15

20

25

30

35

40

45

0

5

10

15

20

25

30

35

40

45

Japan OECD Euroarea

UnitedStates

Mexico Turkey

2007 2014

Productivity growth has slowed

Labour productivity Annual average percentage change over the period

Source: June 2015 OECD Economic Outlook database.

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

OECD United States Euro area Japan

1980-1994 1995-2007 2008-2010 2011-2014

Investment recovery

lags previous cycles

Business investment in different cycles Cyclical peak in OECD real business fixed investment=100

(date of peak indicated)

Source: June 2015 OECD Economic Outlook database.

Sluggish investment means:

● Slower potential output growth

● Labour scarring

● Stagnant incomes, rising inequality

● Slower technology diffusion from innovation frontier 80

90

100

110

120

130

140

150

80

90

100

110

120

130

140

150

t 2 4 6 8 10 12 14 16 18 20 22 24 26 28

t=1973Q4 t=1981Q4

t=2000Q3 t=2008Q1

Quarters since the peak

Sluggish investment explains part of the

slowdown in potential growth Loss in potential output relative to pre-crisis trend

Percentage point difference in 2014, relative to the counter-factual

Note: “Employment” is the combined contribution of changes in the NAIRU and the participation rate.

Source: OECD calculations based on June 2015 Economic Outlook database.

-12

-10

-8

-6

-4

-2

0

2

4

-12

-10

-8

-6

-4

-2

0

2

4

Employment Capital per worker TFP Total

Policies: getting to an “A”

Monetary policy is on track

in the major economies Inflation expectations 2-3 years ahead, per cent

Note: Expected average annual inflation based on inflation swaps.

Source: Datastream; OECD calculations.

With below-target inflation and sub-par growth almost everywhere, most central banks should maintain a supportive monetary policy

Policy rates are expected to begin normalising first in the United States, which will pose challenges elsewhere

Swings in commodity prices and exchange rates should trigger a policy change only if expectations are becoming de-anchored

0.0

0.5

1.0

1.5

2.0

2.5

3.0

0.0

0.5

1.0

1.5

2.0

2.5

3.0United States Japan Euro area

Addressing medium-term fiscal challenges

would reduce uncertainty

Public debt Per cent of GDP

Note: For health care expenditure, averages across countries are unweighted. BRIICS are Brazil, China, India, Indonesia,

Russia and South Africa. Health care expenditure is projected with assumption that countries do not implement policies

which would reduce the expenditure.

Source: June 2015 Economic Outlook database; OECD Economic Policy Papers, No. 06, "Public spending on health and

long-term care: a new set of projections“.

Public health care expenditure pressure Percentage deviation from 2006-10

expenditure/GDP ratio

40

60

80

100

120

140

160

180

200

220

240

40

60

80

100

120

140

160

180

200

220

240United States

Japan

Euro area

OECD

0

1

2

3

4

5

6

7

0

1

2

3

4

5

6

7

OECD BRIICS

2030 2060

Structural policy can help to revive

investment, supporting inclusive growth

Estimated impact of shocks on investment Percentage change after 5 years

1. 16% reduction in OECD index of regulation in energy, transport and

communications (ETCR) over 5 years, equivalent to the average pace of

reduction among 15 OECD countries during the period 1993-2013.

2. Two-standard-deviation reduction in policy uncertainty corresponds to a 26%

reduction.

Source: OECD calculations.

Diffusion of

innovation Investment

Potential

growth

Demand, jobs

0.0

0.2

0.4

0.6

0.8

1.0

1.2

0.0

0.2

0.4

0.6

0.8

1.0

1.2

Product marketliberalisation

Two-standard-deviation

reduction inpolicy

uncertainty

1% increase inforeign demand

1% increase indomesticdemand

1

2

Key messages

Global growth improving, but still moderate – the B- world economy could do better

Monetary easing (accompanied by currency depreciation in some countries), reduced fiscal drag and low oil prices underpin the projected improvement

Stronger investment is needed to strengthen demand, halt the slowdown in potential growth, improve diffusion of technology and increase employment

Balanced packages of mutually reinforcing monetary, fiscal and structural policies, undertaken collectively, are needed to get the strong, inclusive, sustainable growth that would earn the world economy an A