The trade situation remains inherently fragile, according to the OECD
When words like ‘deterioration’, ‘uncertainty’ and ‘weak’ are used in connection with trade and investment flows by a body as eminent as the OECD, it’s a cause of great concern for shipping.
In his analysis of the organisation’s latest Economic Outlook, chief economist Laurence Boone used all three words within her opening thoughts, proving the depth of the trade quagmire that the global economy is stuck in.
The OECD now puts global GDP growth prospects at 2.9% for 2019 and project them to remain around 3% for 2020-21, down from the 3.5% rate projected a year ago and the weakest since the global financial crisis. Global trade volume growth of goods and services is estimated to have slowed to 1% this year – its lowest rate since 2009.
Short-term country prospects do, however, vary with the importance of trade for each economy. For example, GDP growth in the US is expected to slow to 2% by 2021, while growth in Japan and the euro area is expected to be around 0.7 and 1.2% respectively. China’s growth will continue to creep down, to around 5.5% by 2021. Other emerging market economies are expected to recover only modestly, amid imbalances in many of them. “Overall,” points out Ms Boone, “growth rates are below potential.”
This is partly blamed on an unbalanced mix of monetary and fiscal policies; however Ms Boone’s biggest concern is that the deterioration of the outlook “continues unabated”, reflecting unaddressed structural changes more than any cyclical shock.
Two ongoing structural changes are singled out by the OECD: climate change and digitalisation. Add to this, trade and geopolitics that are moving away from multilateralism. “It would be a policy mistake to consider these shifts as temporary factors that can be addressed with monetary or fiscal policy: they are structural,” says Ms Boone. “In the absence of clear policy directions on these four topics, uncertainty will continue to loom high, damaging growth prospects.”
The OECD also raises concern that growth could be weaker still if downside risks materialise or interact. These risks include further escalation of trade and cross-border investment policy restrictions, continued uncertainty about Brexit, a failure of policy stimulus to prevent a sharper slowdown in China, financial vulnerabilities from the tensions between slowing growth, high corporate debt and deteriorating credit quality, and a persistent upward spike in oil prices. There is more than a passing concern that the cyclical downturn is “becoming entrenched”.
The current stabilisation at low levels of economic growth, inflation and interest rates does not warrant policy complacency,” it said. “The situation remains inherently fragile, and structural challenges – digitalisation, trade, climate change, persistent inequalities – are daunting.
AP Moller-Maersk’s third quarter outlook mirrors the negativity. Last week, it cut its forecast for global container demand to 1%-2% in 2019 from 1%-3% after a relatively weak third quarter. What makes this all the more significant is that the third quarter is usually the busiest of the year due to restocking for the Christmas season.
Speaking to the Financial Times about its latest report, chief executive Soren Skou said: “What has happened now is that the trade tensions have really started to impact business sentiment. Business leaders across the world are worried, they’re less confident about the future. Either the consumer wins and things will be better, or the businesses will be right and we’re heading for low growth or even a recession in the next few years.”
The OECD also blames trade policy tensions for some of the sluggishness and agrees with Mr Skou that the greatest problems are the affects those trade tensions are having on confidence and investment. The OECD also notes that reallocation of activities across countries and adjustment to supply chains as a result of persisting trade tensions is both “a drag on demand and a source of weaker medium-term growth by reducing productivity and incentives to invest”.
The organisation advises that strengthening international co-operation is crucial, particularly to find agreement on transparent and fair international taxation and trade rules. For its part, the OECD is also looking at how dedicated public investment funds can be geared to help meet long-term objectives such as ensuring society benefits fully from advances in digital technology or facilitating transition to a low carbon future.
The fact that trade and investment are structurally changing with digitalisation, the rise of services and geopolitical risks, could also be seen as an opportunity rather than a challenge.
The OECD advises a “clear policy direction for transitioning towards sustainable growth amidst digitalisation and climate challenges”, with governments focusing on long-term gains. For example, the creation of national investment funds, focused on investing in the future, “could help governments design investment plans to address market failures and take account of positive externalities for society as a whole”.
In a second recommendation, the OECD advises that greater trade policy predictability and transparency could go a long way towards reducing uncertainty and reviving growth.
Thirdly, fiscal and monetary policies can be “better activated” through co-ordinated efforts.
Speaking in Beijing where he was meeting Chinese Premier Li Keqiang and other heads of international organisations, OECD secretary-general Angel Gurría neatly summed up the current sentiment when he said:
The alarm bells are ringing loud and clear.
He continued: “Unless governments take decisive action to help boost investment, adapt their economies to the challenges of our time and build an open, fair and rules-based trading system, we are heading for a long-term future of low growth and declining living standards.”