OCTOBER 8, 2019
Growth is taking a dangerous downward turn
by Laurence Boone, OECD Chief Economist
For over 18 months, since the outbreak of trade hostilities, growth has been weakening, slowly but surely. In May 2018 the OECD, along with other organisations, was predicting global growth of around 4% for 2019, whereas our current forecasts are for growth of below 3%. In the first half of 2018, global investment was increasing at an annualised pace of nearly 5%, and trade over 4%. This year, the annualised growth rate of investment could slide to below 1%, with trade turning negative in the second quarter. Growth prospects have plummeted in the wake of trade and investment.
An urgent response is required, failing which we run the risk of finding ourselves stuck in a long period of low growth, the brunt of which will be felt primarily by the most vulnerable.
This is because the events of the last 18 months are not just a passing trend. The proliferation of tariffs and subsidies and the increasing unpredictability of trade policies have destroyed growth in international trade, triggering a sharp slowdown in industrial output and investments. When companies do not know what tomorrow will bring, they exercise their “wait-and-see option”. Given that an investment is a long-term commitment, they are waiting for this insidious trade war to settle down in order to know where to invest. However, when temporary uncertainty is recurrent and rooted, large amounts of investments are withheld, thereby affecting not just present day demand but also tomorrow’s growth potential and employment.
The investment gap created by this situation will have a long-term and structural impact on growth, all the more so as it will take time to clarify the new trade policy environment. This is clearly exemplified in the digital sector, given how the fastest investor always has a strong edge. But it is also the case for infrastructures, which are essential for business development. And at present, in addition to the digital sector, there is a global and structural need for infrastructure investment of nearly 7 trillion dollars per year, taking into account the energy transition in addition to traditional investment requirements. Paradoxically, the investment gap is growing at a time when governments can obtain long-term financing at very low, even negative, rates.
There is a therefore a danger of growth being bogged down for a long time. It is dangerous to use the good performance of the service sector as compared to the decline in industry as a justification for policy inaction given that the two are inextricably linked. It is equally risky to draw a distinction between countries with a large industrial sector and countries that are more service-based and therefore supposedly less at risk, given that integrated supply chains exist at both the regional and global level, and between services and industries.