The Organization for Economic Cooperation and Development (OECD) downgraded its assessment of the global economy to the worst growth rate since the financial crisis - Photo by OECD.

JAKARTA (TheInsiderStories) – The Organization for Economic Cooperation and Development (OECD) downgraded its assessment of the global economy to the worst growth rate since the financial crisis. In its interim economic outlook released on Thursday (09/19), the Paris-based agency cut its global GDP view to 2.9 percent this year, a downgrade of 0.3 percentage points, and its growth view for 2020 was reduced by 0.4 percentage points to 3.0 percent.

“Economic prospects are weakening for both advanced and emerging economies, and global growth could get stuck at persistently low levels without firm policy action from governments, according to the Outlook.

The Outlook covers all group of 20 (G20) economies and includes downward revisions to projections from the previous Economic Outlook in May 2019 for almost all countries, particularly those most exposed to the decline in global trade and investment that has set in this year. In May OECD estimated the global economy would grow 3.2 percent this year and 3.4 percent in 2020.

Meanwhile, trade tensions have weighed on business confidence, knocking investment growth down from four percent two years ago to only one percent today.

The OECD said that there was evidence that the trade standoff was taking its toll on the United States (US) economy, hitting some manufactured products and triggering farm bankruptcies. The agency cuts its view of the world’s biggest economy growth by 0.4 points in 2019 to 2.4 percent and by 0.3 points in 2020 to 2 percent.

China would also feel the pain with its economy, the second-biggest in the world, growing 6.1 percent in 2019 and 5.7 percent in 2020. Those are outlooks the OECD cut from the 6.2 percent and 6.0 percent previously projected.

“Escalating trade policy tensions are taking an increasing toll on confidence and investment, adding to policy uncertainty, weighing on risk sentiment in financial markets, and endangering future growth prospects,” the OECD said.

The OECD estimated that a sustained decline in Chinese domestic demand of about two percentage points annually could trigger a significant knock-on effect on the global economy.

If accompanied by a deterioration in financial conditions and more uncertainty, such a scenario would mean global growth would be cut by 0.7 percentage points a year in the first two years of the shock.

Meanwhile, uncertainty over government policies was also hitting the outlook for Britain as it lurches towards Brexit, its plan to leave the European Union (EU).

The OECD forecast British growth of one percent in 2019 and 0.9 percent in 2020, but only if it left the EU smoothly with a transition period – a far-from-certain conclusion at this stage. In May, the OECD had forecast growth of 1.2 percent and one percent.

If Britain leaves without a deal, its economy will be two percent lower than otherwise in 2020-2021 even if its exit is relatively smooth with fully operational infrastructure in place, the OECD said.

The eurozone would not be spared from negative spillovers under such a scenario and would see its GDP cut by half a percentage point over 2020-21.

The OECD trimmed its forecast for the shared currency bloc, largely due to the slowdown in its biggest economy, Germany, which was estimated to be in a technical recession.

Eurozone growth was seen at one percent – down from 1.2 percent in May – this year. It was projected for one percent in 2020, down from 1.4 percent in May.

The OECD said Germany’s economy had probably shrunk in the second and third quarters with a slump in car manufacturing, which accounts for 4.7 percent of German GDP, knocking three-fourths of a percentage point off German growth.

“The global economy is facing increasingly serious headwinds and slow growth is becoming worryingly entrenched. The uncertainty provoked by the continuing trade tensions has been long-lasting, reducing activity worldwide and jeopardizing our economic future,” said OECD Chief Economist Laurence Boone.

Governments need to seize the opportunity afforded by today’s low-interest rates to renew investment in infrastructure and promote the economy of the future, Boone added.

The Outlook calls on central banks to remain accommodative in the advanced economies but stresses that the effectiveness of monetary policy could be enhanced in many advanced economies if accompanied by stronger fiscal and structural policy support.

It says the fiscal policy should play a larger role in supporting the economy, by taking advantage of exceptionally low long-term interest rates for wider public investment to support near-term demand and future prosperity.

Greater structural reform ambition is required in all economies to help offset the impact of the negative supply shocks from rising restrictions on trade and cross-border investment and enhance medium-term living standards and opportunities.

Written by Lexy Nantu, Email: lexy@theinsiderstories.com