World economy risks getting caught in 'low-growth trap'

AP News
Posted: Jun 01, 2016 7:15 AM
World economy risks getting caught in 'low-growth trap'

PARIS (AP) — The world economy risks getting caught in a "low-growth trap" if governments don't spend more on investments, open up to trade, and make reforms, a top economic forum warned Wednesday.

The Organisation for Economic Co-operation and Development said in a wide-ranging report that it is increasingly pessimistic about the global outlook and cut its growth forecasts.

Among the risks identified by the Paris-based economic agency, which represents the world's most developed economies, was a potential British exit from the European Union, volatility in financial markets, and Europe's inability to find a common response to its refugee flows.

Above all, the OECD said in its Global Economic Outlook that weak growth risks becoming chronic.

"This low growth trap involves a cycle in which diminished expectations become self-fulfilling," said Angel Gurria, the OECD's secretary-general.

According to the OECD, firms are too cautious to invest, are holding back innovation and productivity. As a result, households are getting more pessimistic about jobs and the future. The ensuing weaker consumer spending then feeds back into pessimism among companies, creating a vicious cycle.

Though the U.S. economy has improved in recent years, the next biggest economy, China, is slowing. Because it's a major consumer of raw materials and energy, as well as being a huge exporter and increasingly important consumer, concerns have grown over the state of the world economy.

Elsewhere, the European economic recovery has failed to gain much traction while Japan remains sluggish. And emerging markets are struggling to deal with volatile currencies, high debt and the crash in prices for goods they export — Brazil and Russia, for example, are in deep recessions.

The OECD said countries have relied too much on central banks to stimulate demand and should instead look to strengthen public investment and make their economies more competitive through structural reforms.

It is forecasting global growth of 3 percent this year and 3.3 percent next. Both are down 0.3 percentage point from its last set of forecasts in November.

The OECD reiterated its view that a vote for a British exit from the EU later this month "would depress growth in Europe and elsewhere substantially."

It estimated that in the case of an EU exit, Britain's economy could be 5 percent smaller by 2030 than if the country remained in the bloc.