The OECD just gave the global economy a B-Minus for growth, says business can do better

Getty/Marco Di Lauro

It’s hard to fathom why the OECD has just given the global economy a B-minus grade in its latest forecast for the global economy.

That’s because the OECD is forecasting a return to long-run average growth by late 2016. It is also forecasting more evenly-spread growth and smaller global imbalances than before the global economic crisis of 2008. The OECD also believes labour market weakness is healing – read more people are finding work – and it believes the risk of deflation is receding.

That sounds pretty good. Perhaps B-minus is still as good as it was when I was at school.

But the OECD says it can’t give a higher mark because the “starting point is inauspicious. The first quarter of 2015 saw the weakest global growth since the crisis. The United States experienced a particularly sharp dip, but a number of other advanced economies shrank during the quarter, and growth in China slowed down more than expected.”

Like the Fed, the OECD sees “this weakness at the beginning of the year as largely the result of temporary factors”, and the OECD believes the fall in oil and loose monetary policy will pretty quickly kickstart global growth this year:

The boost to consumption from lower oil prices is still expected to come through in oil-importing countries, where demand will also be spurred by the widespread monetary easing (often accompanied by currency depreciation) in countries accounting for more than 50% of world GDP. A generally neutral fiscal stance in most large economies will not be a drag on growth, unlike in the previous few years.

What’s really holding the global economy back, is the lack of business investment. OECD chief economist Catherine L Mann said demand weakness had been hindering investment as business struggled to see the returns they would make on their investment in the current environment.

But she highlighted the positive feedback loop that business investment creates for businesses and within the global economy. “Boosting the performance of the global economy requires jumping to a higher growth equilibrium with more investment, that creates more employment, jobs, and consumption demand, which ratifies the higher rate of investment, leading to the beneficial supply-side outcome,” Mann said.

The good news is the OECD believes “fixed investment growth in the OECD region picks up to 4% next year, the highest rate since the crisis.”

Business has to do its part and the OECD believes consumers and consumption will rise to deliver the return on that investment business seeks. But Mann and her colleagues have a very pointed message for politicians around the globe.

It’s clear she believes policy uncertainty has played a big role in holding growth back.

Reducing policy uncertainty would help, such as a tone-down of fiscal brinksmanship in the United States, favourable resolution of Greece’s status vis-à-vis the euro area, realistic medium-term fiscal path in Japan, and greater transparency of financial systems in emerging economies.

Forecasts are uncertain by their very nature but it is clear in this OECD outlook that seven years of economic weakness might finally be giving way to a more positive economic outlook around the world.

Here the table of the OECD’s forecasts:

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