The global economy will strengthen slowly in the next 18 months and growth will only approach its precrisis pace at the end of 2016, the Organization for Economic Cooperation and Development said Wednesday.
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The Paris-based organization issued its low-spirited outlook after the global economy recorded an unexpectedly weak first quarter with a sharp contraction in the U.S. and slower-than-expected growth in China. The OECD cut its growth forecast for the U.S. to 2% this year from its 3.1% forecast in March and to 2.8% from 3% for 2016.
Even if the weakness in the first quarter is likely transitory, the outlook for the global economy is still unsatisfactory due to a sustained trend of low investment and low demand, the OECD said.
"We give the global economy only the barely passing grade of B-," OECD chief economist Catherine Mann said in an introduction to the economic outlook.
The OECD said the gross domestic product of its 34 members will rise 1.9% in 2015 and 2.5% in 2016.
The prudent outlook sharpens the spotlight on concerns there is a fundamental shift to lower growth in since the 2008 global financial crisis. By the OECD's reckoning, the upswing of the recovery in the last seven years has been unusually weak, crimping job creation, putting living standards on hold and increasing inequality.
In its report, the OECD singled out investment as a key source of concern. On a global level, investment across the private and public sectors is now about 20% below what it would have been in a normal cyclical recovery, Ms. Mann said in an interview with The Wall Street Journal.
In the U.S., the fall in investment in the oil and gas sector following a decline in oil prices is more dramatic than the OECD expected and may go on for longer. U.S. consumers are also more reticent to spend than the OECD previously thought.
There is a risk that low investment and a weak economy are locked in mutually reinforcing spiral.
"The main reason for the weakness in investment is the weak recovery itself and doubts over the prospects for stronger growth," the OECD said in its report.
Even if investment picks up as the OECD expects, this would still be insufficient to deliver strong global growth, Ms. Mann said.
Many of the solutions are already in place, particularly loose monetary policy in major economies, the OECD said. In Japan and the eurozone, central banks should continue with their quantitative easing programs as planned, the OECD said. And in the U.S., the Federal Reserve should carry out a gradual increase in rates. The OECD expects the first interest-rate increase in September.
To rebuild confidence and spur investment, policy makers should focus on lifting factors of uncertainty, the OECD said. Key sources of uncertainty include fiscal brinkmanship in the U.S., how Japan will craft a plan for its public finances, and crucially Greece's future in the eurozone. Ms. Mann declined to say whether Greece should remain in the eurozone, but said the country and the wider eurozone economy urgently need clarity.
"It would be best to have the situation resolved," Ms. Mann said.