Trade tensions cloud best global growth outlook in seven years: OECD

[March 13, 2018]   By Leigh Thomas

PARIS (Reuters) - Trade tensions are threatening the best global economic growth outlook in seven years, the OECD said on Tuesday, adding that four U.S. rate rises are likely this year as tax cuts stoke the world's biggest economy while Brexit will drag on Britain.

While broadly more optimistic than only a few months ago, the Organisation for Economic Cooperation and Development warned a trade war could threaten the outlook, and forecast that UK growth would lag all G20 countries due to Brexit uncertainties.

Updating its outlook for the G20, the OECD, which groups 34 of the world's leading economies, raised its global growth forecast for 2018 and 2019 to 3.9 percent -- the highest since 2011 -- from a previous estimate of 3.6 percent for both years.

The higher forecast was in part due to expectations that U.S. tax cuts would boost economic growth there, it said.

"We think the stronger economy is here to stay for the next couple of years," acting OECD chief economist Alvaro Pereira told Reuters. "We are getting back to more normal circumstances than what we've seen in the last 10 years."

Rebounding global business investment would keep global trade growth at about 5 percent this year, the OECD forecast.

However, it said the global economy was vulnerable to an eruption of trade tensions after the Trump administration imposed import tariffs on steel and aluminum, a move that is expected to prompt retaliation from Europe and others.

"This could obviously threaten the recovery. Certainly we believe this is a significant risk, so we hope that it doesn't materialize because it would be fairly damaging," Pereira said.

For a table of forecasts:

FISCAL EASING

The OECD forecast the U.S. economy would grow 2.9 percent this year and 2.8 percent in 2019, with tax cuts adding 0.5-0.75 percentage points to the outlook in both years.

Against that backdrop, the Federal Reserve would probably have to raise interest rates four times this year as inflation picks up, Pereira said. Previously the OECD had estimated three hikes would suffice this year.

A seagull flies by as cargo ships and an offshore supply vessel lie at anchor at sunrise off Sousse, Tunisia February 14, 2018. Picture taken February 14, 2018. REUTERS/Darrin Zammit Lupi /File Photo

With tax cuts boosting the economy this and next year, the OECD forecast the upper bound of the target federal funds rate could reach 3.25 percent by the end of 2019 from 1.5 percent currently.

Britain was seen missing out on the global upturn, lagging all other G20 countries with growth of only 1.3 percent this year. That was higher from a November forecast of 1.2 percent due to the broader global improvement.

With Britain due to leave the European Union next year, its economic growth was seen easing to 1.1 percent in 2019, unchanged from the OECD's November estimate.

The OECD said high inflation would eat into UK household income while business investment would slow in the face of uncertainty over Britain's future relationship with the EU.

In contrast, stronger growth in France and Germany boosted the outlook for the broader euro zone to 2.3 percent for this year and 2.1 percent in 2019. Previously, the OECD had forecast growth of 2.1 percent and 1.9 percent respectively.

Fiscal easing in Germany's coalition agreement was seen lifting growth in the euro zone's biggest economy to 2.4 percent this year (+0.1 percentage point) and 2.2 percent in 2019 (+0.3).

President Emmanuel Macron's social welfare, tax and labor market reforms would help France narrow the gap with Germany, with growth forecast at an 11-year high of 2.2 percent (+0.4) before easing to 1.9 percent in 2019 (+0.2).

With the euro area economy resilient, rising inflation would allow the European Central Bank to reduce its bond purchases gradually this year and subsequently phase out its negative interest rate policy, the OECD said.

(Reporting by Leigh Thomas; Editing by Catherine Evans)

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