Trading blows: OECD slashes global growth forecast to decade low

The trade war between the United States and China has plunged global growth to its lowest levels in a decade, the Organisation for Economic Co-operation and Development (OECD) announced as it slashed its forecasts.

The OECD said on Thursday that the global economy risked entering a new and lasting low-growth phase if governments continued to dither over how to respond.

The global economy will see its weakest growth since the 2008-2009 financial crisis, slowing from 3.6 percent last year to 2.9 percent this year before predicted three-percent growth in 2020, the OECD said.

The Paris-based policy forum said the outlook had taken a turn for the worse since it last updated its forecasts in May, when it estimated the global economy would grow 3.2 percent this year and 3.4 percent in 2020.

“What looked like temporary trade tensions are turning into a long-lasting new state-of-trade relationships,” OECD chief economist Laurence Boone told Reuters.

“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,” she added.

Trade growth – which had been the motor of the global recovery after the financial crisis – had fallen from five percent in 2017 into negative territory now, Boone said.

Meanwhile, trade tensions have weighed on business confidence, knocking investment growth down from four percent two years ago to only one percent today.

Boone said that there was evidence that the trade standoff was taking its toll on the US economy, hitting some manufactured products and triggering farm bankruptcies.

The world’s biggest economy would grow 2.4 percent this year and two percent next year – a slowdown from the 2.8 percent and 2.3 percent respective growth rates that the OECD had forecast in May.

Brexit Britain

China would also feel the pain with its economy, the second-biggest in the world, growing 6.1 percent in 2019 and 5.7 percent in 2020. Those are outlooks the OECD cut from the 6.2 percent and six percent previously projected.

The OECD estimated that a sustained decline in Chinese domestic demand of about two percentage points annually could trigger a significant knock-on effect on the global economy.

If accompanied by a deterioration in financial conditions and more uncertainty, such a scenario would mean global growth would be cut by 0.7 percentage points a year in the first two years of the shock.

Meanwhile, uncertainty over government policies was also hitting the outlook for Britain as it lurches towards Brexit, its plan to leave the European Union.

The OECD forecast British growth of one percent in 2019 and 0.9 percent in 2020, but only if it left the EU smoothly with a transition period – a far-from-certain conclusion at this stage. In May, the OECD had forecast growth of 1.2 percent and one percent.

If Britain leaves without a deal, its economy will be two percent lower than otherwise in 2020-2021 even if its exit is relatively smooth with fully operational infrastructure in place, the OECD said.

The eurozone would not be spared from negative spillovers under such a scenario, and would see its gross domestic product (GDP) cut by half a percentage point over 2020-21.

The OECD trimmed its forecast for the shared currency bloc, largely due to the slowdown in its biggest economy, Germany, which was estimated to be in a technical recession.

Eurozone growth was seen at one percent – down from 1.2 percent in May – this year. It was projected for one percent in 2020, down from 1.4 percent in May.

Boone said Germany’s economy had probably shrunk in the second and third quarters with a slump in car manufacturing, which accounts for 4.7 percent of German GDP, knocking three-fourths of a percentage point off German growth.