OECD Cuts Global Growth Forecasts for 2015 – Who or What is to Blame?

by the Curmudgeon



Yawn….the beat goes on:  In its latest Economic Outlook report, the Organization for Economic Cooperation and Development (OECD) cut to its forecast for global economic growth to 3.1% in 2015, down from the 3.7% it had forecast in its previous semi-annual report, released last October.   That’s significantly lower than the 3.9% annual growth rate in the decade through 2011.  Last year, the world economy grew 3.3%. 


The gross domestic product (GDP) of its 34 member countries will rise only 1.9% in 2015 and 2.5% in 2016, according to the Paris based OECD.  The organization says that global economic growth (“recovery?”) in the past seven years has been unusually weak, crimping job creation, putting living standards on hold and increasing inequality.


OECD noted that investment is badly lagging and risks like a possible Greek debt default are hurting consumer and corporate confidence.  Big companies are reluctant to spend on plants, equipment and technology as they did in past recoveries.  Lack of demand has also held back employment, wages and consumption, the organization said.  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 Economic Outlook report.


Why might that be?  We’ve explained why in many past posts, including last week’s.  Blame non-existent fiscal policy and reckless monetary policies.


“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 the report.  “Weakness in the first quarter in the US and in many emerging markets may signal more underlying weakness than embedded in the projections,” the OECD staff wrote.


“We’re looking at a global economy that in some respects is moderately good,” OECD Chief Economist Catherine Mann said in an interview.   “There’s a lot of monetary accommodation, less fiscal drag; most countries are enjoying reduction in oil prices. All of that is good news and yet what we’re getting is growth” that isn’t matching the average of the past two decades, she added.


The 1st quarter GDP contraction in the U.S. accounted for the biggest part of the 2015 forecast revision.  The OECD expects the U.S. economy to grow just by 2% this year and 2.8% next, down from its November forecast of 3.1% and 3%, respectively.  


A softer expansion in China, the world’s second largest economy, was also a factor.  OECD expects China to grow more slowly than it last predicted in November, expanding 6.8% this year rather than 7.1%.


But the OECD hiked its growth forecasts for the Eurozone economy, crediting bolder-than-expected monetary easing by the European Central Bank (ECB) for the increase.  It now expects growth in the euro area to rise by 1.4% this year and 2.1% in 2016, up from 1.1% and 1.7% respectively.


Overall the OECD said the global recovery since the 2008 economic and financial crisis had been "unusually weak".


Investment Lagging from Public & Private Sector:


"By and large, firms have been unwilling to spend on plant, equipment, technology and services as vigorously as they have done in previous cyclical recoveries," OECD stated in its latest semi-annual report.  The Paris think tank said many governments had also delayed investing in infrastructure, negatively affecting jobs and living standards.


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. 


Yet stock prices (i.e. S&P 500) have risen over 228.3% since the U.S. “economic recovery” started in June 2009 to the close of trading on June 3, 2015.  How many analysts appreciate that you can’t cut CAPEX indefinitely and still expect economic growth in the future?


Ms. Mann firmly believes that increased corporate and government investment (in real things) is needed to spur economic growth. 

“The first quarter of 2015 saw the weakest global growth since the crisis. The United States experienced a particularly sharp dip, but a number of other advanced economies shrank during the quarter, and growth in China slowed down more than expected. We see this weakness at the beginning of the year as largely the result of temporary factors. The boost to consumption from lower oil prices is still expected to come through in oil-importing countries, where demand will also be spurred by the widespread monetary easing (often accompanied by currency depreciation) in countries accounting for more than 50% of world GDP. A generally neutral fiscal stance in most large economies will not be a drag on growth, unlike in the previous few years. But even if we are right about the transitory nature of the latest bout of weak growth, the outlook is not satisfactory. Despite tailwinds and policy actions, real investment has been tepid and productivity growth disappointing. By and large, firms have been unwilling to spend on plant, equipment, technology and services as vigorously as they have done in previous cyclical recoveries. Moreover, many governments postponed infrastructure investments as part of fiscal consolidation.”


“But whether investment accelerates in line with our projections is a key question hanging over the improving outlook that we depict. Moreover, even if it does, this would still be insufficient to deliver the strong global growth in the near term needed to increase employment and reduce inequality; potential output growth would still look anemic compared to past decades.”


Have any Wall Street analysts or commentators/talking heads read the above quote let alone the entire OECD report?  We think not, because the decoupling of stock prices and real economic growth continues unabated.


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., Japan’s uncertain plan for its public finances, and 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 on that issue.


“A budget-neutral reallocation of public spending towards investment would. . . support the economy’s growth potential, provided projects are carefully chosen, and make debt dynamics more favorable,” the Economic Outlook stated.


U.S. Economic-Outlook


In a note to ShadowStats subscribers on Wednesday, John Williams wrote:


“To the extent that underlying fundamentals will continue to shine through all the regular monthly volatility and distortions, headline activity should continue to favor much weaker-than-expected payroll gains, and higher-than-expected unemployment rates.” 


That doesn't augur well for 2nd Quarter U.S. GDP growth!

Till next time....


The Curmudgeon


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Curmudgeon is a retired investment professional.  He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996.  He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies and government policies.  Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

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