OECD Sees Global Economic Growth Reaching Seven-Year High

By Paul Hannon Features Dow Jones Newswires

The global economy is on course for its best year since 2010 as both the U.S. and the eurozone grow more rapidly than had been expected, the Organization for Economic Cooperation and Development said Tuesday.

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The Paris-based research body said further acceleration is likely in 2018, but warned that growth would slow from 2019 without new measures to encourage business investment, which remains short of precrisis levels.

"It's a hump-shaped projection, where the peak of the hump is now," said Catherine L. Mann, the OECD's chief economist. "We don't see a breaking out of the growth pattern."

For Ms. Mann, much of the recent pickup in growth is due to the continuation of supportive central-bank policies around the world, with the recent addition of more stimulative fiscal policies, including proposed tax cuts in the U.S.

But what is missing is an intensification of competition that would drive increased investment and gains in productivity that could in turn raise real wages.

"What's been lacking over the last 10 years is business dynamism," said Ms. Mann in an interview with The Wall Street Journal. "Fierce competition makes people nervous. But when businesses compete with each other to make their customers happier, it's a good thing."

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The OECD called for a new push to open up markets for goods and services, as well as workers. But it acknowledged that "threats to roll back openness permeate the policy landscape," a reference in particular to the possibility of added barriers to international trade.

In the last of four reports on the global outlook for this year, the research body repeated its warning of a disconnect between the behavior of rapidly rising asset prices and more modest economic progress, and added a new note of concern over high levels of debt.

"If we look at the corporate debt buildup, it looks pretty scary," said Ms. Mann. "If we look at global house prices, they look pretty scary."

Ms. Mann added that while the measures of indebtedness that were "flashing red" ahead of the global financial crisis aren't at their 2007 levels, they are "pretty close." Among the changes the OECD would like to see are reforms to tax systems to remove incentives for businesses to borrow rather than raise additional equity capital.

The OECD raised its growth forecasts for the U.S. and the eurozone this year and next. It now sees the former growing 2.2% this year and the latter 2.4%. If the OECD is right, it would be second straight year in which the eurozone has outpaced the U.S. But 2018 is expected to see the return of a more traditional relationship, with the U.S. growing 2.5% and the eurozone 2.1%. However, the research body's economists expect U.S. growth to slow in 2019, while remaining faster than that of the eurozone.

The OECD left its growth forecasts for China unchanged from September, and cut its forecasts for Canada. Overall, it now expects the global economy to expand 3.6% this year, up from 3.5% forecast in September, while the 2018 growth projection was unchanged at 3.7%.

The research body welcomed moves by the U.S. Federal Reserve and the European Central Bank that have made growth less reliant on their stimulus. The Fed has begun to shrink its bond portfolio and is preparing to raise its key interest rate for the fifth time since December 2015 next month.

The ECB has announced that it will cut its monthly bond purchases to EUR30 billion ($35.7 billion) from EUR60 billion in January. But while participants in financial markets see that as a prelude to a first rise in the key interest rate toward the middle of 2019, the OECD said it would be better if the ECB waited until 2020 to make that move.

Write to Paul Hannon at paul.hannon@wsj.com

(END) Dow Jones Newswires

November 28, 2017 05:14 ET (10:14 GMT)