GLOBAL ECONOMIC OUTLOOKVéronique SALINS, ECO/MPD25 March 2019

• Growth is weakening, especially in Europe– Business sentiment is moderating– Tariffs and policy uncertainties are weighing on trade growth– Financial market conditions have improved– Labour markets have improved and support domestic demand but wages and

inflation remain surprisingly modest

• Downside risks are more prominent: vulnerabilities in China, Europe and financial markets could weaken growth further

• Weaker long term growth prospects call for more ambitious structural reform efforts

Summary

Global growth is slowing with further signs of decoupling

0

0.5

1

1.5

2

2.5

3

3.5

2016Q1

2017Q1

2018Q1

% y-o-y Annual GDP growth

USA Euro area Japan

Source: OECD Main indicators database, Thomson Reuters and OECD calculations.

2.0

2.5

3.0

3.5

4.0

4.5

2015 2016 2017 2018 2018Q4

World GDP growth

Quarterly Year-on-Year

%

0

1

2

3

4

5

6

7

2014Q1 2015Q1 2016Q1 2017Q1 2018Q1

Industrial production

Quarterly Year-on-Year

% changes, a.r.

Industrial production and retail sales are easing

0

1

2

3

4

5

6

2014Q1 2015Q1 2016Q1 2017Q1 2018Q1

Retail sales volume

Quarterly Year-on-Year

% changes, a.r.

Source: OECD Main indicators database, Thomson Reuters and OECD calculations.

Global trade has slowed down amid rising trade policy uncertainty

-1.5

-1

-0.5

0

0.5

1

1.5

2

2.5

3

2015m2 2015m8 2016m2 2016m8 2017m2 2017m8 2018m2 2018m8 2019m2

Trade policy uncertainty

United States Japan

Normalized, 3 mma

-2

-1

0

1

2

3

4

5

6

7

8

2014 2015 2016 2017 2018

Global Trade Growth

Quarterly Year-on-Year

% changes, a.r.

Note: The series in the RHS chart are derived from newspaper coverage of trade policy uncertainty in the countries shown. Source: OECD Economic Outlook Database; policyuncertainty.com ; and OECD calculations.

-2

-1.5

-1

-0.5

0

0.5

1

1.5

2

2015M2 2016M2 2017M2 2018M2 2019M2

Normalized, 3 month moving

average

Composite PMI

Aes EMEs

Business survey indicators continue to moderate especially in the advanced economies

-3

-2

-1

0

1

2

3

2015M2 2016M2 2017M2 2018M2 2019M2

Normalized, 3-month moving

average

Manufacturing new export orders

AEs EMEs

Source: OECD Main indicators database, Thomson Reuters, Markit and OECD calculations.

Real GDP growth has been revised down

OECD March 2019 Interim Economic Outlook ProjectionsYear-on-year, %. Arrows indicate the direction of revisions since November 2018.

Note: Difference in percentage points based on rounded figures. Dark red for downward revisions of 0.6 percentage points and more. Dark green and dark orange for, respectively, upward and downward revisions of 0.3 percentage points and more but less than 0.6 percentage points. Light green and light orange for, respectively, upward and downward revisions of less than 0.3 percentage points. The European Union is a full member of the G20, but the G20 aggregate only includes countries that are also members in their own right. 1. Fiscal years starting in April.

Financial market conditions have improved following recent declines in long-term bond yields

Source: Thomson Reuters.Note: data up to March 2019. Stock market indices are the S&P500, FTSE Eurotop 100, Nikkei 225 and Shanghai Composite.

80

90

100

110

120

130

140

150

160

Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19

USA Euro Area China

-0.5

0

0.5

1

1.5

2

2.5

3

3.5

Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19

USA EA DEU JPN UK

Equity pricesJanuary 2016=100

10-year government bond yields

0

2

4

6

8

10

12

14

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

% Unemployment rate

United States Euro area Japan

OECD-wide unemployment has fallen below its pre-crisis level and wages are slowly picking up

Source: OECD Short-term labor statistics; OECD Economic Outlook database; and OECD calculations.

0

0.5

1

1.5

2

2.5

3

3.5

2015Q4 2016Q2 2016Q4 2017Q2 2017Q4 2018Q2 2018Q4

Nominal wage growth

United States Euro Area Japan

Y-o-y % changes

20

40

60

80

100

120

140

Brent oil pricesUSD

Commodity prices have been volatile

0.5

0.7

0.9

1.1

1.3

1.5

1.7

1.9

2.1

2.3

2.5

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Non-oil commodity prices

Metals and minerals

Food

Agricultural raw materials

Index 2015=100

Note: Data up to March 21, 2019 for the LHS figure, up to February 2019 for the RHS figure. Source: OECD Main Indicators Database, Thomson Reuters and OECD calculations.

0.0

0.5

1.0

1.5

2.0

2.5

2014 2015 2016 2017 2018 2019

Annual headline and core consumer price inflation G7 economies

Core Headline

%

But with moderate wage pressure core inflation remains subdued

Source: OECD main Indicators database, and OECD calculations.

The UK economy has weakened since the referendum and a disruptive Brexit would have sizeable short term costs

-3.5

-3

-2.5

-2

-1.5

-1

-0.5

02018 2020 2022

UK GDP relative to staying in the EU%, difference from baseline

99

100

101

102

103

104

105

106

107

108

109

2016 2017 2018

United Kingdom OECD

Index 2016Q2 = 100

Investment has declined

Estimates in the RHS figure are simulations using the NiGEM and METRO global models under the assumption of trade on a WTO basis between the UK and the EU27 from 2019-2023. Taken from OECD Economic Policy Paper no.16 (2016).

Slower credit growth or higher bond yields would weaken the euro area further

13

10-year government bond yieldCredit growth

-12.5

-10.0

-7.5

-5.0

-2.5

0.0

2.5

5.0

7.5

2010 2012 2014 2016 2018

Italy Germany France Spain% y-o-y

2019

Sovereign bond yieldsBank credit to non-financial corporations

-1

0

1

2

3

4

5

6

7

8

2010 2012 2014 2016 2018

Germany France Italy Spain%

2019

Source: Thomson Reuters and OECD calculations.

Financial pressure on EMEs has eased, but China and East Asia are still experiencing a trade slow down

2

3

4

5

6

7

8

9

2

3

4

5

6

7

8

9

Jan-17 Jul-17 Jan-18 Jul-18 Jan-19

Turkey Argentina Global EMEs% pts % pts

Mar-19

EME sovereign bond yield spreads have declined

85

90

95

100

105

110

115

Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Dec-18

China East Asia

Index 2015-19 average = 100

Feb-19

New export ordersManufacturing

Source: OECD Main indicators database, Thomson Reuters and OECD calculations.

Additional US-China trade shocks would have global effects, especially if uncertainty rose further

-1.5

-1.25

-1

-0.75

-0.5

-0.25

0CHN USA World MEX East Asia CAN ROW JPN Euro

Trade shocks only Trade shocks plus uncertainty

Impact of new tariffs imposed on US-China bilateral trade and higher uncertainty % change in level of GDP from baseline in 2021

Trade shock is bilateral tariffs of 25% on all US-China trade by the end of 2019. Additional uncertainty shock based on a 50bp rise in global investment risk premia for three years, slowly fading thereafter. OECD estimates using NiGEM model.

A slow down in China would weight on growth across the world

-0.6

-0.5

-0.4

-0.3

-0.2

-0.1

0.0

United States Euro area Germany Japan Commodityexporters

East Asia World

% Trade Uncertainty

Simulated impact on NiGEM model of a two-year decline of 2 percentage points per annum in domestic demand growth in China and a rise of 50 basis points in investment risk premia in all economies. The blue bars show the contribution from the direct slowdown in trade; the green bars show the additional contribution from adding higher uncertainty. Commodity exporters include Argentina, Brazil, Chile, Indonesia, Russia, South Africa and other non-OECD oil-producing economies. East Asia includes Korea and the Dynamic Asian Economies.

GDP impact of a negative demand shock of 2% pts in China%, difference from baseline in the first year

Medium-term growth have weakened calling for structural reforms ambitions to be revived

Note: Based on OECD estimates of potential output growth for 46 economies (LHS chart) and consensus forecasts in April for 2001 to 2016, and October 2018 (RHS chart). The countries covered account for around 84% (LHS chart) and 88% (RHS chart) of global GDP in PPP terms. Source: OECD Economic Outlook 104 database; Consensus Economics; and OECD calculations.

0

1

2

3

4

5

6

7

8

2001 2006 2011 2016 2018

Potential output growth

World Advanced economies EMEs

1

2

3

4

5

6

7

2001 2006 2011 2016 2018

Average annual GDP growth expected over next decade

World Advanced economies EMEs

ANNEX

Implemented tariffs

50

2380

Note: Peterson Institute for International Economics; US International Trade Administration; and OECD calculations.

US merchandises imports in 2017 and tariffs announcements

USD, billion

The value of US trade in cars and car parts is sizeable