U.S. tax cuts and government spending increases will likely deliver a boost to the global economy this year and next, but that could be offset by an escalation of tensions over trade, the Organization for Economic Cooperation and Development said Tuesday.
Global economic growth accelerated last year as higher investment and falling unemployment drove pickups in most major economies. In its quarterly report, the Paris-based research body said it expects growth to ease off in some of those economies this year, but not by as much as it did when it last released projections in November.
It sees continued pickups in a number of other large economies including “significant” accelerations in the U.S., Germany, France, Mexico, Turkey and South Africa.
The big difference between then and now is the combination of tax cuts and government spending increases passed by Congress in December and February respectively. According to the OECD, these measures will boost U.S. economic growth to 2.9% this year and 2.8% next, compared with the 2.5% and 2.1% expansions it forecast previously.
With the assistance of a more modest budget stimulus from Germany, that package should help global economic growth pick up to 3.9% in both this year and next, compared with previous forecasts of 3.7% and 3.6%.
“That’s fairly close to the historic average,” said
the OECD’s acting chief economist. “The world economy is a lot stronger than it used to be.”
But there are clouds on the horizon, as the OECD warned the global pickup could be weakened by a series of tit-for-tat tariff increases initiated by proposed U.S. charges on steel and aluminum imports.
Citing the negative impact of previous trade conflicts on growth and jobs, the OECD appealed to U.S. trade partners not to rush into retaliatory action.
“Escalation would not be the road we would want to go down because we know from history what will happen,” said Mr. Pereira, a former minister of economy in Portugal. “Escalation usually goes down fairly badly for everybody. It’s important to rely on global solutions to excess capacity in the steel industry.”
The OECD didn’t give figures for the losses in output that would likely follow an escalation, but the Dutch ING Bank Tuesday published a separate analysis which estimated the scale of the damage from a broad, 10% charge on European Union exports to the U.S., and U.S. exports to the EU. It calculated that the EU economy would be 0.3% smaller after two years, and the U.S. economy 0.4% smaller.
The OECD welcomed the steps being taking by leading central banks to reduce the stimulus they have provided to support economic growth.
“We are finally getting out of the legacy of the financial crisis, in terms of macroeconomic policy,” Mr. Pereira said, in an interview with The Wall Street Journal.
With growth in the U.S. set to strengthen, the OECD now expects the Federal Reserve to raise its key interest rate four times this year, and the same in 2019, having previously reckoned on three moves. It also expects the European Central Bank to wind down its bond-buying program later this year, and start to raise its key interest rate thereafter.
However, it said there are some risks to the “normalization” of interest rates given the high levels of debt and asset prices.
“The prolonged period of low-interest rates and volatility has encouraged greater risk-taking, making the financial system more exposed to shifts in market sentiment as monetary policy normalizes,” the OECD said. “New tensions are particularly likely if policy rates were to be changed abruptly in event of an upside inflation surprise.”
The research body said it is therefore “essential” that central banks provide “clear communication about the path to normalization.”
Write to Paul Hannon at firstname.lastname@example.org