OECD Cuts Global Outlook Again and Warns Worse May Be Ahead

(Bloomberg) -- The global economy is suffering more than expected from trade tensions and political uncertainty which are clouding prospects particularly in Europe, according to a gloomy report from the OECD.

As these are the organization's first forecasts in almost four months, it's partly playing catch-up with developments since then. In that period, little has gone right for the world's biggest economies: Weakness in the euro area and China are proving more persistent, trade growth has slowed sharply and uncertainty over Brexit has continued.

“The global expansion continues to lose momentum,'' the Paris-based Organization for Economic Cooperation and Development said as it downgraded almost every Group of 20 nation's economy. “Growth outcomes could be weaker still if downside risks materialize or interact.”

The OECD's numbers are more downbeat than the IMF's for many economies, particularly the euro region and the U.K., as the organization warns that things could get worse.

However, there have been some small signs recently that the global economy is stabilizing, while the U.S. and China are making progress on ending their lengthy trade dispute. JPMorgan's global composite Purchasing Managers Index rose in February for the first time in three months, while some euro-area gauges were also better than anticipated.

“Getting a clear steer on global growth is very difficult right now, but at least, the latest PMIs have some positives,” HSBC economist James Pomeroy said in a note on Wednesday.

Central banks including the Federal Reserve have already responded to the changed circumstances, and the European Central Bank may soon follow. China, forced to lower its goal for economic growth this week, has rolled out tax cuts to stimulate its economy.

The OECD outlook goes against hopes that sources of weakness at the end of 2018, including lower confidence, would prove temporary. That creates a headache for policy makers who may now need to find more combative solutions with limited room for maneuver on the fiscal and monetary side.

While central banks should stay in expansionary mode, the group called for structural reforms and fiscal stimulus in the European countries that could afford it, saying that “monetary policy alone cannot resolve the downturn in Europe or improve the modest medium-term growth prospects.”

The OECD cut its growth outlook for this year to 1 percent from 1.8 percent. ECB policy makers are meeting in Frankfurt this week, and the OECD said they should signal a delay to any rate hikes and possibly implement new measures to improve funding for banks. Both measures are expected to be discussed in Frankfurt on Thursday.

Europe took the brunt of the downgrades. While the U.S. outlook was lowered slightly, the U.K.'s 2019 forecast was cut to 0.8 percent from 1.4 percent, and Germany's to 0.7 percent from 1.6 percent.

The OECD also singled out Brexit as one of the persistent threats. If the U.K. doesn't secure a deal, it sees a risk of a near-term recession, with “sizeable negative spillovers” on other countries.

China is another concern, and a sharper slowdown there would have “significant adverse consequences for global growth and trade.'' The OECD report was prepared before China announced its new growth target range of 6 percent to 6.5 percent. The OECD expects expansion to slow to 6 percent next year from 6.2 percent in 2019.

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