Growth is slipping dangerously –

by bold-lichterman

For more than 18 months, since the start of trade hostilities, growth has been weakening, slowly but surely. While in May 2018, the OECD like other institutions predicted global growth for 2019 to be close to 4%, today we estimate that it will be below 3%. Global investment grew at a rate of almost 5% in the first half of 2018, and trade at over 4%. This year, the annualized growth rate of investment could drop below 1%, and that of trade is negative in the second quarter. Growth prospects have collapsed with investment and trade.

It is urgent to react, otherwise we risk finding ourselves stuck in weak growth for a long time, which will first penalize the most vulnerable.

Because what has happened in the last 18 months is not temporary : The increase in tariffs and subsidies and the growing unpredictability of trade policies have destroyed the growth in trade, causing a sharp slowdown in industrial production and investment. When companies don’t know what tomorrow will bring, they exercise their “wait-and-see option”: like a long-term investment, they wait for the latent trade war to stabilize before knowing where to invest. But when temporary uncertainty repeats and takes hold, a mass of investment goes unmanned, and affects not only demand today, but also growth capacities and jobs tomorrow.

The investment deficit created by this situation will have a long-term, structural impact on growth, especially since it will take time to clarify the new trade policy situation. Digital technology is a striking example, as the advantage lies with the first investor. But this is also the case for infrastructure, on which business development depends. However, in addition to digital technology, there is a global, structural need for investments in infrastructure, nearly $ 7 trillion each year in the world if we take into account the energy transition in addition to traditional investment needs. And the paradox is that the investment deficit is growing even though States can finance themselves at very low, even negative, rates for a long time.

Growth is therefore in danger of stalling for a long time. Opposing the good performance of services to industrial decline to justify political inaction is dangerous because the two are intimately linked; distinguishing between countries with large industrial sectors and more service-oriented countries which would have less to fear is also risky, because production chains are integrated regionally, globally and between services and industries.

The first priority is to halt the drop in demand resulting from the collapse of trade, which particularly penalizes capital investments. This must be based on a triptych of economic policy: a clear policy of low interest rates, a policy of investment in infrastructure, and reforms in favor of innovation. Monetary policy alone will struggle to cope with the fight against the downward spiral in which we are, but it is harmful to suggest that it has reached the end of its capacity for action. While monetary policy, especially after years of support, cannot do everything, it can also do a lot: by protecting the cost of financing both companies and governments over the long term, monetary policy creates the conditions necessary for private and public investment.

The euro zone, for example, would already be in a much better situation if it had mobilized budgetary tools, that is to say public investment, and carried out reforms favoring innovation much earlier! In our forecast of September, we show how a public investment of around 0.5pts of GDP per year in European countries with low debt, with reforms promoting innovation in all countries would have allowed monetary policy to be less aggressive, favored short- and long-term growth, without inflating public debts, and avoiding half of the increase in the prices of financial assets over the past five years.

The second lever is to restore business confidence in their ability to find outlets: It is now clear that trade tensions are not a temporary epiphenomenon. The prevailing international regulatory framework for trade is lastingly damaged, and the WTO will not be found as we know it.

Publicly recognize that world trade is facing structural change, that trade agreements will no longer be global, but perhaps more regional, more targeted and that there is a will to move forward between “like-minded” countries, would give a clear signal to companies to resume investment .

Growth is stuck at low levels, but policy can do a lot. Restore confidence in the collective capacity to establish clearer, more transparent and more protective rules for citizens for exchanges; take advantage of the certainty on the rates provided by monetary policies to increase investment, and therefore the growth and jobs of tomorrow. It’s possible. It’s urgent.

The contributor:

Laurence Boone is chief economist at the OECD and represents the OECD at preparatory meetings on the financial aspect of the G20. Before joining the OECD, she was chief economist of the Axa group. She was a member of the board of directors of Kering and continues to sit on the strategy committee of Agence France Trésor. She is a member of the Cercle des Économistes and the SDA Bocconi. Previously, she held the following positions: Special Advisor to the President of the French Republic, Chief Economist and CEO at Bank of America Merrill Lynch, CEO and Chief Economist at Barclays Capital, Economist at the OECD, Economist at CEPII in France and quantitative analyst at Merrill Lynch Asset Management.