OECD ECONOMIC OUTLOOK - Australian National University

Better, but not good enoughOECD ECONOMIC OUTLOOKincluding perspective on AustraliaCatherine L. MannOECD Chief Economist13 June 2017Canberra, COSCOPE blog: oecdecoscope.wordpress.com

Key messagesGlobal growth expected to pick-up modestlywith upside risks.But, productivity and wage growth remain subdued andfinancial stability risks persistThe gains from structural trends and trade are widelydistributed, but the costs are concentrated, esp. by regionsAn integrated policy approach to make good on promises tocitizens, including making globalisation work for all2

Outline Cyclical vs potential growth and promisesPersistent financial risksDiagnosing globalization backlashResponsive policy3

Global GDP growth should pick up modestlybut remains below historical normsGlobal GDP growthSource: OECD June 2017 Economic Outlook database.4

Is growth in consumption and investment stillsluggish relative to previous recoveries?ConsumptionInvestmentNote: OECD shown. Current recovery shows since 2008Q1 including the forecasts in the dotted line. Previous 3 recoveries prerecession peak in 1973Q4, 1980Q1 and 1990Q3. Consumption is real total consumers’ expenditure and investment is real totalgross fixed capital formation.Source: OECD November 2016 Economic Outlook database.5

Confidence indicators point to pick-up,but they have become less reliableConsumer and business confidencePerformance of confidence indicatorsOECD and BRIICS, IndexOECD and BRIICS, 5-year correlation with activityNote: Confidence indices are GDP PPP weighted averages of individual country standardised series where long-term average 100.Consumer confidence correlation with global retail sales growth and business confidence with global industrial production growth.Source: OECD Main Economic Indicators database; and OECD calculations.6

Investment is increasing but capital stock is oldPotential upside from technology upgradingProductive capital stock growthHigh tech productsNote: Global semi-conductor billings in nominal US dollars. Major advanced computer and electronics output is a weighted average of production ofcomputer and electronic products for the United States, output of computer, electronic and optical products for Germany, and production of informationand communications electronics equipment plus electronic parts and devices for Japan.Source: OECD June 2017 Economic Outlook database; World Semi-Conductor Statistics; Eurostat; Board of Governors of the Federal Reserve System;Japan Ministry of Economy, Trade and Industry; and OECD calculations.7

Labour market recovery is incompleteand real wage growth remains sluggishUnemployment and underemploymentReal wage growthOECD, share of labour forceHorizontal lines are averages for 1987-2007Note: Real wages measured as labour compensation per employee adjusted for the GDP deflator.Source: OECD June 2017 Economic Outlook database; OECD Employment database; US Bureau of Labor Statistics; Eurostat; and JapanStatistics Bureau.8

Better, but not good enoughGDP growth per person, income inequalityGDP growth per personIncome inequality is rising in the OECDHorizontal lines are averages for 1987-2007Real household disposable income, total populationNote: RHS is the unweighted average of 17 OECD countries.Source: OECD June 2017 Economic Outlook database; and OECD Income Distribution database.9

Better, but not good enoughSobering views: current situation vs blics-more-upbeat-about-the-economy/10

China role in global economy (1)stimulus reflected in import growthChina nominal fixed asset investmentNote: Commodity producers includes Argentina, Australia, Brazil, Chile, Colombia, Norway, New Zealand, Russia, Saudi Arabia, South Africaand other oil producing countries.Source: OECD June 2017 Economic Outlook database; and National Bureau of Statistics of China.11

China’s role in the global economy (2)Recovery in global trade, in part, from ChinaContributions to world trade growthNote: Commodity producers includes Argentina, Australia, Brazil, Chile, Colombia, Norway, New Zealand, Russia, Saudi Arabia, South Africaand other oil producing countries.Source: OECD June 2017 Economic Outlook database; and National Bureau of Statistics of China.12

China’s role in the global economy (3)commodity and financial markets1. Share of loans to China in total foreign loans of all BIS reporting banks, on anultimate risk basis.Note: Commodity producers includes Argentina, Australia, Brazil, Chile, Colombia, Norway, New Zealand, Russia, Saudi Arabia, South Africaand other oil producing countries.Source: OECD June 2017 Economic Outlook database; and National Bureau of Statistics of China.13

OECD Economic Outlook ProjectionsReal GDP growthYear-on-year, United States2.61.62.12.4Euro area .3United Kingdom2.21.81.61.0China6.96.76.66.4India 2Brazil7.97.17.37.7-3.8-3.60.71.6World1Note: Difference in percentage points based on rounded figures.1. With growth in Ireland in 2015 computed using gross value added at constant prices excluding foreign-owned multinationalenterprise dominated sectors.2. Fiscal years starting in April.14

Financial Risks Persist15

Low volatility measures, but high risk oflarge equity price decline in US16

Rising private credit in EMEs andhousing market risks in advanced economiesPrivate non-financial sector creditHouse price-to-rent ratioAverage since 1980 100Note: EMEs excluding China is an unweighted average of ratios for Argentina, Brazil, Colombia, India, Indonesia, Mexico, Russia, Malaysia, SouthAfrica and Turkey.Source: BIS; OECD Analytical House Price database; and OECD calculations.17

Inflation generally below objectives; potentialinterest rate divergence creates financial risksCore inflationMarket-based expectations ofovernight interest rates15-day moving averageNote: Core inflation for Japan adjusted for the impact of consumption tax increases.Source: OECD June 2017 Economic Outlook database; Bloomberg; and OECD calculations.18

Diagnosing globalization backlashorthe challenge of structural trends19

Trade specialisation and patterns have shiftedWorld goods tradeWorld trade by typeShare of world goods exports, volumesExports, valuesOECDRest of the WorldChinaDynamic Asian Economies20151995Note: LHS – Dynamic Asian Economies includes Malaysia, the Philippines, Singapore, Thailand, Vietnam, Chinese Taipei and Hong Kong.RHS – Business services includes R&D, ICT, real estate and other business activities. Financial services includes financial intermediation,insurance, pension funding and other financial activities.Source: OECD-WTO Trade in Value Added (TiVA) database; UN Comtrade database; and OECD calculations.20

Job losses have centred onpeople with mid-level skillsJob polarisation by countryChange in share of total employment by skill level, 1995-2015Note: OECD is the unweighted average of 24 countries. For Japan 1995-2010.Source: OECD Employment Outlook 2017; European Union Labour Force Survey; Labour force surveys for Canada, Japanand the United States; and OECD calculations.21

Advanced economies have moved up thevalue chain, but EMEs are moving up tooShare of export goods by complexityNote: In nominal terms. Least complex is the 1st quartile of products by complexity (e.g. crayons), most complex is the 4th quartile (e.g. medicalequipment), excluding major commodities. Dynamic Asian Economies includes Malaysia, the Philippines, Singapore, Thailand, Vietnam, ChineseTaipei and Hong Kong. Europe is the unweighted average of the Czech Republic, France, Germany, Ireland, Italy, Poland, Portugal and the UK.Source: UN Comtrade database; and OECD calculations.22

Manufacturing job losses and role forTechnology & Consumer Preferences vs TradeFactors explaining the decline in manufacturing jobsChange in share of total employment, annual average 1990-2008Note: Decomposition based on regression estimation. Each factor is based on the change over the period. Technology and consumerpreferences include ICT and machinery investment, changes in the manufacturing consumption share and time specific effects.Source: OECD Economic Outlook database; STAN database; and OECD calculations.23

Decline in manufacturing matters becauseactivity is regionally concentratedGeographic concentration index by sectorAverage from 2000 to 2015 or latestMoreconcentratedNote: “Distributive trades” includes distributive trade, repairs, transportation and storage, accommodation and food service activities. Index measuresthe extent to which employment is concentrated in particular regions, varying between 0 (no concentration, where all regions of a country have thesame manufacturing employment rate) and 100 (maximum concentration, where all manufacturing employment is concentrated in the smallest region).The index incorporates the size of the region and is based on OECD (2003) “Geographic Concentration and Territorial Disparity in OECD Countries”.Source: OECD Regional database; and OECD calculations.24

Countries with larger falls in manufacturingjobs have increased regional inequalityChange in average income inequality across regions2000 to 2015 or latest, 90:50 percentiles ratio, % ptsWideningdispersion ofregional incomesFall in share ofmanufacturing jobsChange in national manufacturing employment rate2000 to 2015 or latest, % ptsSource: OECD Regional database; and OECD calculations.25

An integrated policy approachis neededto respond to structural trendsand make good on promises26

Make the international system work better,and create a more level playing fieldActions in response to OECD Going for GrowthrecommendationsNumber of reforms, 2015-16Actions to improve the internationalenvironment: Pursue open markets for cross-border tradeand investment Preserve institutions and standards, such asfor labour and environmental protection Promote multilateral cooperation, e.g. ontax base erosion and profit shifting andcompetition policy Combat corruption, illicit trade andcounterfeitingNote: includes all OECD and BRIICS countries, the EU and Colombia.Source: OECD Going for Growth 201727

Strengthen ambition on structural reform:Particularly productivity-enhancing reformsIndicator of number of actions taken in response toOECD Going for Growth recommendationsSource: Going for Growth 201728

Help people to adapt, take new opportunitiesthru ALMPs, heightened business competition29Source: OECD Going for Growth 2017.

Fiscal initiatives using the window ofopportunity of low interest ratesFall in government interest paymentsEstimated budget gains over 2015-17 due to lower interest ratesNumber of years a permanent investmentincrease of 0.5% of GDP can be funded withtemporary deficitsNote: Budget gains calculated based on general government debt at the end of 2014, assuming that 25% of this initial debt stock matures each year,comparing the interest rate on 10-year government bonds in 2014 with the interest rate for 2015 and the 2016 average to August for 2016 and 2017.Source: OECD June 2016 Economic Outlook database; and OECD calculations.30

Many countries are exploiting fiscal space,but some (esp in Europe) could do moreOECD recommends more expansionary policy than projectedRecommended fiscal stance for 2017ContractionaryMildly contractionaryBroadly neutralMildly expansionary ExpansionaryARG, BRA, COL, CRI,GRC, SVKBELAUS, GBR, IDN,KORCHL, CZE, DNK, ESP,IND, IRL, ISR, JPN,LTU, MEX, NZL,PRT,TUR, SWE, ZAFFRA, RUS, AUT,FIN, NLDCHESVNCAN, ITA, NOR,POLDEU, EST,LVACHNUSA, LUXContractionaryMildly contractionaryProjectedfiscal stance Broadly neutralfor 2017Mildly expansionaryExpansionaryHUNISLOECD recommends less expansionary policy than projectedSource: OECD November 2016 Economic Outlook database; and OECD November 2016 Economic Outlook Special Chapter, “Using fiscal levers toescape the low growth trap”.31

Unlike most others, Australia makes effectivebudget choices, so can use fiscal space32