(Bloomberg) -- The OECD warned world leaders that protectionist politics risk undermining an investment recovery that has the global economy improving without showing real acceleration.
World output is set to expand by 3.5 percent this year -- more than the 3.3 percent predicted at the beginning of March and up from 3 percent last year, the Paris-based Organization for Economic Cooperation and Development said Wednesday in a report. The outlook for 2018 was unchanged at 3.6 percent growth.
“Investment has been a missing support for global growth, trade, productivity and real wages,” OECD Chief Economist Catherine Mann wrote in the report. While improving demand and strong competition policies are helping change that, “protectionist policies in G-20 countries and anti-globalization rhetoric” are creating “reservations” among investors.
Doubt about the benefits of world trade has moved from the margins to the center of the global political conversation since voters put Donald Trump in the White House and opted last year to pull Britain out of the European Union.
At a meeting in Sicily two weeks ago, Group of Seven leaders watered down their traditional defense of open markets at the behest of President Trump, saying only that trade needs to be “free, fair and mutually beneficial.” They will resume the discussion at a meeting of the larger Group of 20 in Hamburg in July.
Downside Risks
The financial and economic consequences of the debate are potentially high.
“Geopolitical shocks and trade protectionism could catalyze snap-backs in asset prices and realize downside risks through a variety of channels,” Mann wrote. “Global equity prices have increased, reaching historic highs in the United States and Germany, despite little upward revision to GDP growth and inflation.”
The S&P 500 Index of U.S. equities is up 15 percent in the past year. Germany's DAX Index is up 23 percent.
U.S. gross domestic product, meanwhile, is set to expand 2.1 percent this year and 2.4 percent in 2018, the OECD said Wednesday. That compares with forecasts of 2.4 percent and 2.8 percent growth made by the organization at the beginning of March.
Euro-area growth is seen as even more tepid at 1.8 percent both this year and next, according to a report. That compares with 1.6 percent predicted in early March.
“Monetary policy is appropriately moving toward a more neutral stance in the United States,” while central banks in Europe and Japan are using forward guidance, Mann said. “These actions and words help investors to assess policy risks, to bring asset price valuations into alignment with economic fundamentals,” she added.
To contact the reporter on this story: Mark Deen in Paris at markdeen@bloomberg.net.
To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Jana Randow, Paul Gordon
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