Paris, 18 February 201611h00

Catherine L. MannOECD Chief Economist

OECD INTERIM ECONOMIC OUTLOOK

Stronger growth remains elusive: Urgent policy response is needed

www.oecd.org/economy/economicoutlook.htmECOSCOPE blog: oecdecoscope.wordpress.com/

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Key messages

Stronger global growth remains elusive• Weak trade, investment, and commodity prices• Disappointing incoming data on demand conditions• Low inflation and poor wage growth

Financial instability risks are substantial • Steep declines in global equity markets• Volatile capital flows and high debt exposures in EMEs

Collective policy action is urgent• Maintain accommodative monetary policy• Focus supportive fiscal policies on investment-led spending• Revive pace of productivity- and growth-enhancing structural reforms

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Global growth forecasts: Revised Down

Global GDP growth in 2016 projected to be no higher than 2015

Global growth revised down by 0.3% pts in both 2016 and in 2017

Growth barely recovering in advanced countries, slowing in many EMEs

GDP forecasts

Forecast downgrades since November

Source: OECD Economic Outlook databases; and OECD calculations.

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Interim Economic Outlook Forecasts

Real GDP growth (%)1

1. Year-on-year. GDP at market prices adjusted for working days.2. Difference in percentage points based on rounded figures for both the current and November 2015 Economic Outlook forecasts.3. Fiscal years starting in April.

2015

Column2 Column3February 2016

Interim Projections

difference from November Economic Outlook2

February 2016 Interim

Projections2

difference from November Economic Outlook22

World 3.0 3.0 -0.3 3.3 -0.3

United States 2.4 2.0 -0.5 2.2 -0.2Euro area 1.5 1.4 -0.4 1.7 -0.2 Germany 1.4 1.3 -0.5 1.7 -0.3 France 1.1 1.2 -0.1 1.5 -0.1 Italy 0.6 1.0 -0.4 1.4 0.0Japan 0.4 0.8 -0.2 0.6 0.1Canada 1.2 1.4 -0.6 2.2 -0.1United Kingdom 2.2 2.1 -0.3 2.0 -0.3

China 6.9 6.5 0.0 6.2 0.0India3 7.4 7.4 0.1 7.3 -0.1Brazil -3.8 -4.0 -2.8 0.0 -1.8

Rest of the World 2.1 2.5 -0.3 3.1 -0.2

2016 2017

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Global demand cannot be sustained solely by the US recovery

Consumption growth has been steady, but investment and exports have weakened

Appreciation of the US dollar has contributed to fall in exports in late 2015

Source: OECD Economic Outlook Database

Contributions to quarterly US GDP growth

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Rebalancing in China and financial volatility are dragging on global markets

Composition of growth in ChinaGrowth is slowing and rebalancing from manufacturing to services, but with mounting financial vulnerabilities

External financial management is proving to be challenging

Note: Manufacturing (secondary) includes construction.Source: Chinese National Bureau of Statistics; People’s Bank of China; and Thomson Reuters.

Currency depreciation and declining reserves

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Commodity prices have been falling

The sharp fall in oil and commodity prices reflects supply running ahead of demand

Lower oil prices should help consumers, but have depressed investment

Source: OECD Economic Outlook database; and Thomson Reuters.

Commodity prices

Baltic Dry Index

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Significant slowdown in global trade growth

Note: World trade is goods plus services trade volumes. World GDP growth is measured at purchasing power parities.Source: OECD Economic Outlook database.

Global trade volumes and GDP

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Sluggish demand leads to low inflation and weak wage growth

Note: Latest month available. Core inflation is for consumer prices excluding food and energy. The private consumption deflator is used for the United States. Source: OECD Economic Outlook databases.

Core inflation Compensation per employee

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Financial markets are reassessing prospects, triggering lower and more volatile equity prices

Share prices in major markets

Share prices have fallen sharply since December

Market volatility worldwide has increased

Volatility Index (VIX)

Source: Thomson Reuters.

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Risks of financial instability are substantial, particularly from emerging markets

Nominal effective exchange rates

Exchange rates have depreciated sharply and capital flows have been volatile

Borrowing costs are rising

Source: OECD Exchange Rate database; and Thomson Reuters.

EMEs sovereign bond spreadsEMBI Composite, basis points

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Some EMEs are vulnerable to exchange rate shocks and high domestic debt

Credit to corporations has increasedPercent of GDP

External liabilities are significantPercent of GDP, 2014 or latest available

Note: Credit to non-financial corporates. For South Africa, 2008 rather than 2007.Source: OECD November 2015 Economic Outlook database; BIS; and OECD calculations.

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A stronger collective policy response is needed

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Monetary policy working alone is not sufficient to support global demand

Central bank balance sheets

The European Central Bank and Bank of Japan have announced new measures

US monetary policy is expected to tighten at a slower pace

Note: Policy rate shows the top of the target range.1. Future overnight market interest rates derived from overnight index swap rates. Source: Thomson Reuters; Bloomberg; and OECD calculations.

US federal funds rate expectations

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Fiscal policy is contractionary in manymajor economies, although not in China

While the pace of consolidation has eased, drag on global demand continues

Fiscal stimulus in China is supporting growth

Note: For China, change in the general government balance as a per cent of GDP from 2014-15.Source: OECD Economic Outlook databases.

Change in the underlying primary balance 2014-16

Tighter policy

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Interest rates are very low, providing an opportunity to borrow and invest

Government bond yields have fallen and some are now negative over short horizons

Source: Thomson Reuters.

2-year government bond yields

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Collective fiscal action promotes growth and fiscal sustainability

1st year effects of a ½ per cent of GDP public investment stimulus by all OECD economiesChange from baseline

Note: Simulation using the NiGEM model, based on a two-year increase in the level of government investment equivalent to ½ per cent of GDP per annum in all OECD countries. The euro area figures are a weighted average of Germany, France and Italy.Source: OECD calculations.

Collective action should focus on public investment and pro-growth structural policies

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The pace of structural reforms shows insufficient ambition

Note: Calculated for all countries for which recommendations are available. Emerging market economies include Brazil, Chile, China, Columbia, India, Indonesia, Mexico, Russia, Turkey and South Africa; Mexico and Turkey only prior to 2011. Advanced includes the rest of the OECD. Source: OECD Going for Growth 2016 (forthcoming).

Responsiveness to OECD Going for Growth recommendations Share of recommendations implemented

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Deleveraging proceeded faster and further in the US than the euro area

In the EU, much more progress is needed to boost investment and productivity

Source: European Commission; Eurostat; and Fournier et al. (2015).

Source: Eurostat; OECD Main Statistical Database; and OECD National Accounts Database.

Deleveraging is needed for financial health

Household and non-financial corporate debt

Harmonising and reducing regulation in the EU could raise FDI, and boost trade intensity by 10-25%

Juncker investment plan disappoints

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The GDP impact of uncertaintiesin Europe could be great

Note: The investment decline scenario reduces the growth rate of business investment in all European Economic Area countries by 2½ percentage points in both 2016 and 2017 due to higher policy uncertainty and expectations of weaker medium-term growth. The shock is equivalent to around one fifth of the policy uncertainty shock of 2011. The second scenario adds a 50 basis point increase in equity and investment risk premia in all EU countries, returning approximately one sixth of the financial conditions prevailing at the height of the euro area crisis.Source: OECD calculations.

Change in GDP after two years Per cent

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Summary

Global growth flat-lined due to continued subdued global trade, investment and wage growth in advanced economies

Emerging market economies’ growth models have been exposed by the slowdown in trade and falling commodity prices

Despite the boost from low oil prices and interest rates, the most likely scenario is weak global growth in 2016 and 2017

Substantial downside risks centre on financial market volatility and emerging market debt

Collective fiscal action and more ambition on structural policies would raise global growth and reduce financial risks