OECD Urges Politicians to Step Up as Central Banks Eye Stimulus Exit Door
September 20 2017 - 5:48AM
Dow Jones News
By Paul Hannon
A pickup in global economic growth will prove short-lived unless
governments increase spending on projects that boost productivity
and push through overhauls that deal with the legacy of the
financial crisis, including the problem of " zombie" firms.
That is the verdict of the Organization for Economic Cooperation
and Development in its quarterly report Wednesday. The Paris-based
think tank's new growth forecasts come as leading central banks
prepare to wind down their stimulus measures and places the onus on
politicians to take advantage of a synchronized upturn to tackle
the enduring problems of insufficient investment, weak productivity
and wages growth, and high levels of income inequality.
The OECD said the global economy would grow by 3.5% this year
and 3.7% next, up from 3.1% in 2016. It left its growth forecasts
for the U.S. unchanged, but raised its projections for both France
and Italy, although it expects Germany to continue to lead the
eurozone's recovery. It now expects the French economy to grow 1.7%
this year and 1.6% next, while Italy is seen expanding by 1.4% and
1.2% respectively.
"Headwinds from the recent euro appreciation on activity are
expected to be modest," it said.
While central banks have spent the past nine years supporting
demand growth, the OECD now wants to switch the focus to policies
that boost supply, or the economy's capacity to produce goods and
services.
"We want to exhort policy makers to undertake reforms that are
needed to ensure productivity growth is more robust going forward,"
said Catherline Mann, the OECD chief economist who has worked at
the U.S. Federal Reserve and the Council of Economic Advisers.
Its only significant growth downgrade was to India, reflecting
the impact of the new Goods and Services Tax. Even so, it still
expects the Indian economy to grow by 6.7% this year and 7.2%
next.
With global economic growth strengthening, central banks see
less need for stimulus. Later Wednesday, the Federal Reserve is
expected to announce the beginning of a years-long program to
shrink its bond portfolio. The European Central Bank is likely to
announce in October that it will start to reduce its monthly
purchases of government bonds early in 2018. And November is likely
to see the first increase in the Bank of England's key interest
rate since 2007. If each delivers, it will be the first time that
they have moved together to withdraw stimulus since adopting
extraordinary measures to revive economies scarred by the financial
crises of recent years.
Ms. Mann said central banks now need to look to the demands of
financial stability, having previously privileged growth. The OECD
noted signs that investors may be taking too many risks, including
equity prices that are high relative to expected earnings,
"compressed" yields on corporate bonds and "very low" levels of
stock market volatility.
"That balance has now shifted and it's time to take the foot off
the accelerator," she said.
However, the OECD warned that shrinking the huge portfolios of
assets acquired by central banks since the crisis "represent a
significant challenge."
"To minimize financial market volatility and global spillovers,
central banks should opt to reduce their assets gradually and in a
predictable way," it said.
The think tank, which provides advice to its 35 member
governments, stressed that the change in focus for central banks
doesn't mean the work of boosting growth has been completed.
Instead, that responsibility has shifted to politicians. In
addition to investment spending on education and infrastructure
that boosts productivity in the long run, the OECD said it was time
to pass new laws to boost dynamism, including rules that would make
it easier to close down "zombie" firms.
"Strong political commitment is needed to secure robust
medium-term growth and ensure its benefits are widely shared," it
said.
Write to Paul Hannon at paul.hannon@wsj.com
(END) Dow Jones Newswires
September 20, 2017 05:33 ET (09:33 GMT)
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