World economy faces low-growth trap

The conclusions reached as per a new analysis from the Organisation for Economic Co-operation and Development (OECD) are that, the governments around the world have to focus on investing in education and health to help break out of the low-growth trap and at the same time convince people that globalisation has tangible benefits. In the new OECD analysis it repeats its forecast that global growth will remain at about 3.0 per cent in 2016 and the next year. The OECD also warns that monetary policy is overburdened and simultaneously creating risky financial distortions.
The OECD maintains that the world economy remains in a low-growth trap with persistent growth disappointments weighing on growth expectations and feeding back into weak trade, investment, productivity and wages. As a measure it suggests that fiscal policy should take advantage of low borrowing costs to increase spending with a view to enhancing economic growth.
The OECD's forecast for global economic growth has little changed from its June 2016 forecast. The outlook for emerging economies has improved but growth prospects in advanced economies have deteriorated.
Global economic growth has languished at about 3.0 per cent since the financial crisis in 2008, which is significantly below the 4.0 per cent average annual growth rate of the previous decade. Such slow growth has caused incomes to stagnate in many countries around the globe. This combined with high global income inequality has stoked a backlash against globalisation. This may have contributed to the UK's vote for Brexit and the growing support for populist movements in other countries around the world. The OECD believes "trade policies are a key lever to boost growth". But the widespread revolt against globalisation has been accompanied by a rise in protectionist policies in many countries around the world.
A trend of declining trade damages economic growth prospects for all countries but it is particularly damaging for newly emerging world economies. Participating in global economic and development chains of production helps the emerging economies gain access to new knowledge and technologies to use in their favour.
Catherine Mann, OECD's chief economist, said governments should focus on "spending that has both short-term and long-term benefits for growth but also enhances equality". Investment in education, health and childcare subsidies would substantially boost economic growth and ensure distribution of the benefits of globalisation and trade across society.
Traditional policy measures that focus on investing in infrastructure developments could boost economic growth. But putting more money into expanding education and health provisions would have the added benefit of redistributing the benefits from trade and economic growth across the overall population. This would help ensure all sectors of society gained and would raise support for further growth-enhancing trade liberalisation.  
The OECD in its latest report also raised concerns about distortions in financial markets. More than 35 per cent of OECD government debt is trading at negative yields. This might be expected for highly creditworthy countries such as Switzerland, but is more concerning for countries such as Italy. In addition, despite the average quality of corporate bonds having declined in recent years, the risk premium charged by investors for holding those bonds has fallen.  
These financial distortions make economies more vulnerable to sudden corrections of asset price. The OECD said that they also suggest that monetary policy has become "overburdened" with a risk that continued loose monetary policy will challenge financial institutions' business models and sustainability. The OECD maintains that a more balanced policy mix would put the global economy on a higher growth path and reduce financial risks.
Economic growth in recent years has been slower than in the decade before the financial crisis in 2008. However, it has been in line with the rate of overall growth seen over the longer term. Global economic growth in 2017 is forecast to be 3.2 per cent, about the same rate as was seen on average between 1990 and 2007.
The Paris-based economic agency, which represents the world's most developed economies, maintains that a potential British exit from the European Union, volatility in financial markets and Europe's inability to find a common response to its refugee flows are causes for anxieties. Above all, the OECD said in its Global Economic Outlook that weak economic growth risks becoming chronic. Angel Gurria, OECD's secretary general, said that this low-growth trap involves a cycle in which diminished expectations become self-fulfilling.
The OECD said that the firms are too cautious to invest and are holding back innovation and productivity. In consequence, the households are getting more pessimistic about jobs and the future. Moreover, the ensuing weaker consumer spending then feeds back into pessimism among companies, creating a vicious cycle.         
The writer is a retired Professor of Economics, BCS General Education Cadre.
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