OECD raises global growth forecasts on expected Trump stimulus

PUBLISHED : Tuesday, 29 November, 2016, 2:15am
UPDATED : Tuesday, 29 November, 2016, 2:15am

The OECD lifted its global growth forecasts for 2017 and predicted expansion in 2018 will reach its fastest pace in half a decade as Donald Trump’s planned fiscal stimulus provides a boost to major economies.

World gross domestic product will now expand 3.3 per cent next year, up by 0.1 percentage point from September’s forecast, the Organization for Economic Cooperation and Development said in a semi-annual report. The Paris-based organisation sees the global economy expanding 3.6 per cent in 2018, the fastest pace since 2011.

The S&P 500 Index has risen to a record high and bond yields have increased since Trump won the US election on November 8. The president-elect’s promises of spending on infrastructure as well as tax cuts should lift US demand, spurring investment and boosting overall output once he takes office in January, increases that should also spill over into the rest of the world, according to the OECD.

“In the aftermath of the US elections, there is widespread expectation of a significant change in direction for macroeconomic policy,” the OECD said. “The boost to US final demand also strengthens import growth” and “the stimulus boosts global GDP growth by around 0.1 percentage point in 2017 and 0.3 percentage point in 2018.”

Forecasts increased for all major economies in 2017.

The U.S. itself will grow 2.3 per cent in 2017 and 3 per cent in 2018, while the euro area will expand 1.6 per cent and 1.7 per cent, respectively, the OECD predicted. Growth will now be 6.4 per cent and 6.1 per cent in China and 1 per cent and 0.8 per cent in Japan, the OECD said.

The organisation urged other governments to consider the same fiscal medicine.

“For the last five years the global economy has been in a low growth trap,” OECD Chief Economist Catherine Mann wrote in the report. Exiting this “depends on policy choices beyond those of monetary authorities,” she said, pointing to both fiscal stimulus and structural reform.

In Mann’s view, debt burdens are stabilising and interest rates remain low, providing a window of opportunity for stimulus now that will actually lower borrowing as a percentage of GDP.

“Debt-to-GDP ratios in most advanced countries have flattened,” she wrote. “It is past time to focus on expanding the denominator -- GDP growth.”