PARIS • The global economy is slipping into a self-fulfilling "low- growth trap" where ultra-loose monetary policy risks doing more harm than good, the Organisation for Economic Cooperation and Development (OECD) has warned.
In a highly critical editorial in its latest Economic Outlook, the OECD said rich world governments bear the brunt of the blame for failing to revive demand and failing to overhaul their economies in the wake of the financial crisis in 2008.
According to the group, which advises its 34 member countries, too much of the burden of lifting growth has been left to central banks. After pushing interest rates below zero and pumping money into their economies through asset purchases, they are starting to see diminishing returns and their actions could even generate financial market volatility.
"Overall a rather mediocre, a rather dismal outlook," OECD secretary-general Angel Gurria said in an interview before the outlook was released. "Trade is growing at 2 to 3 per cent; it should be growing at 7."
The remarks underline the lacklustre growth as many emerging markets struggle with a slump in commodity prices and rich economies such as Europe and the United States fail to return to the sort of performance they typically had before the global financial crisis in 2008.
"Monetary policy has been the main tool, used alone for too long," OECD chief economist Catherine Mann said in the semi-annual report released yesterday. "In trying to revive economic growth alone, with little help from fiscal or structural policies, the balance of benefits-to-risks is tipping."
Ms Mann also said "negative feedback loops are at work".
Lack of demand, global uncertainties and slow reform progress are deterring investment, while trade growth remains too weak, she said.
"Monetary policy cannot revive near and long-term growth by itself, and distortions are increasing," the OECD said.
Ultra-low and negative rates have stressed bank profitability and created financial strains for pension funds and insurers, while becoming "less potent" in stimulating consumption, it said.
The worldwide recovery is set to stall this year, with output growing 3 per cent. That forecast is unchanged from the organisation's Feb 18 estimate and it would match the pace seen in 2015. Expansion should accelerate to 3.3 per cent next year, the OECD said.
"Fiscal policy must be deployed more extensively and can take advantage of the environment created by monetary policy," Ms Mann said in her editorial introducing the report. "Governments today can lock in very low interest rates for very long maturities to effectively open up fiscal space."
While the OECD left its global growth forecast unchanged, it cut its 2016 growth projections for the US and Japan, while lifting the projections for the euro area. US gross domestic product is now expected to expand 1.8 per cent this year instead of the 2 per cent predicted in February. The 2017 forecast is unchanged at 2.2 per cent.
BLOOMBERG
