The OECD’s latest interim economic outlook continued to point to the negative impact of protectionist trade policy on economic growth. Their latest projection is for global growth of 2.9% in 2019 and 3% in 2020 down from 3.2% and 3.4% in May: this is the weakest level of growth since the financial crisis. Moreover, they see ‘downside risks continuing to mount’ and describe the outlook at ‘fragile and uncertain’.
Laurence Boone, the OECD’s Chief Economist, commented ‘The global economy is facing increasingly serious headwinds and slow growth is becoming worryingly entrenched’. On the issue of protectionism she noted ‘What looked like temporary trade tensions are turning into a long-lasting new state of trade relationships,” and “The global order that regulated trade is gone and we are in a new era of less certain, more bilateral and sometimes assertive trade relations.’
The report notes a sharp slowdown in aggregate investment in the G20 from 5% (annualised) at the start of 2018 to 1% in 2019. Plus, capital goods production in major advanced economies, an indicator of business investment, declined sharply in 1H’19. They note that demand for consumer durables, especially cars, also eased. Not surprisingly, the OECD notes the impact of this on German growth, which Boone said had probably shrunk in the second and third quarters. The OECD also warns about the risks of a no-deal Brexit projecting UK growth of 0.9% in 2020 if the UK were to leave with a deal but state: ‘A no-deal exit would be costly in the near-term, potentially pushing the United Kingdom into recession in 2020 and reducing growth in Europe considerably.’
While this week’s FOMC decision was more of a ‘hawkish cut’ Jerome Powell emphasised the uncertain outlook, policy is not on a pre-set course and decisions will be made meeting by meeting as the Fed tries to gauge whether it has ‘done enough’ with 50 bps of cuts so far. We suspect not: we continue to expect the negative impact of trade uncertainties, geopolitical risk and Brexit to weigh on the global growth outlook and that the Fed is likely to have to cut rates again.