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OECD trims growth outlook but urges Fed action this week

By Leigh Thomas

The global economic outlook has grown darker than it was only a few months ago, but the United States is doing well enough that its central bank should go ahead with its first rate increase since the financial crisis, the OECD said on Wednesday.

The world economy is set to grow 3.0 per cent this year and 3.6 per cent next year, the Paris-based Organisation for Economic Cooperation and Development said in an update of its forecasts for major economies.

It trimmed its estimates from 3.1 per cent and 3.8 per cent in June, citing primarily a slowdown in emerging market economies like China and Brazil.

“Global growth prospects have weakened slightly and become less clear in recent months,” OECD chief economist Catherine Mann told Reuters in an interview.

The United States stood out as a bright spot. The OECD raised its growth outlook for this year to 2.4 per cent from 2.0 in June. It lowered its 2016 forecast to 2.6 from 2.8 per cent previously, though.

The OECD saw more arguments in favour of the Federal Reserve raising interest rates than standing pat when its policymakers meet this week.

“Raising interest rates now would remove uncertainty in the markets,” Mann said. The pace of future increases was more important than whether the Fed acted , according to the OECD’s simulations, she said: “The path matters four times as much as the timing.”

Looking at the euro zone, its outlook was the brightest in four years. Its growth was projected at 1.6 per cent this year and 1.9 per cent next year.

However, the bloc should be growing as much as a full percentage point faster, Mann said, with a weak euro and low interest rates and oil prices in its favour. It was not because it remained too burdened by its debts, she said.

The euro zone’s priority should be repairing the banking system and tackling bad loans, she said, rather than extending or expanding the European Central Bank’s bond-buying programme as some economists have suggested following recently weak inflation data.

The OECD slightly lowered its growth estimate for China to 6.7 per cent for this year and 6.5 per cent next year after a string of disappointing data and plunges on its stock market.

Brazil was a particularly weak spot in the global economic outlook. The OECD forecast its economy would contract 2.8 per cent this year and 0.7 per cent next year as it struggles with a collapse in the price of commodities it exports.

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