OECD trims world growth forecasts amid 'uncertainties'

China faces the policy challenge of sustaining growth while advancing structural change and managing risks, says the OECD.
China faces the policy challenge of sustaining growth while advancing structural change and managing risks, says the OECD.PHOTO: REUTERS

Group cites 'puzzles' in some major economies and also supports gradual rise in US interest rates

PARIS • The Organisation for Economic Cooperation and Development (OECD) cut its world growth forecasts for this year and 2016 yesterday, warning of a dramatic slowdown in Brazil and a global outlook clouded by uncertainty over China.

It also said the US Federal Reserve would be right to begin raising interest rates this week, warning that uncertainty about the path of tightening posed a greater threat to the economy.

Fed policymakers led by chairman Janet Yellen began their two-day meeting yesterday, with economists divided over whether the gathering will conclude with the first US rate increase in almost a decade.

The OECD, a policy analysis club of 34 advanced economies, had already slashed its economic forecasts just three months ago because of US weakness. Now it has returned to its calculations with an axe, citing in part a crisis gripping emerging markets as China's economic boom, and its voracious appetite for raw materials, slows.

The OECD trimmed its world growth forecast for this year to 3 per cent, lopping 0.1 percentage point off its June estimate. For the world economy in 2016, it lowered its forecast to 3.6 per cent, a reduction of 0.2 percentage point from three months ago.

Its projections for the euro zone were largely unchanged, at 1.6 per cent this year and 1.9 per cent in 2016. The biggest 2015 downgrade was for Brazil, whose economy is estimated to shrink 2.8 per cent this year.

While the US recovery was now solid, the OECD said the picture worldwide was muddied by "puzzles" in other big economies with erratic Japanese data, the euro zone's recovery lacking some vigour and activity in China difficult to assess.

"This leaves the outlook clouded by important uncertainties," it said.

One major uncertainty is whether the emerging markets will be hurt by rising world interest rates or a sharper-than-expected slowdown in China, sparking financial and economic turbulence that could be a "significant drag" on advanced economies, the OECD said.

The group supported a gradual rise in US interest rates but said the pace will be critical.

"What we want to emphasise is what matters is not whether they move tomorrow or whether they move in December," OECD chief economist Catherine Mann said in an interview in Paris. "What matters is the path they take after that and how they communicate it."

In a study published alongside the report, the OECD said policymakers' more aggressive view on rates - compared with that of investors - could mean a weaker US economy in two years.

Officials in the Federal Reserve system currently project the Federal funds rate will be about 1.6 per cent by the end of next year. The policymakers' view would knock 0.4 per cent off the size of the US economy in 2017, the study said.

China faces a challenge trying to sustain growth while changing its economy from an investment-powered model towards one led by consumers, the OECD said.

"The Chinese authorities face the policy challenge to sustain growth while advancing structural change and managing risks," it said.

"Additional stimulus may be needed, but it should rely less on debtfinanced infrastructure and construction spending and more on an expansion of social expenditures that will help support consumer spending and adjustment towards a more balanced growth model."

BLOOMBERG, AGENCE FRANCE-PRESSE

SEE MONEY

A version of this article appeared in the print edition of The Straits Times on September 17, 2015, with the headline 'OECD trims world growth forecasts amid 'uncertainties''. Print Edition | Subscribe