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"The world economy is in a dangerous place,"
Angel Gurria said as the OECD announced its latest, lower
forecasts for growth on May 21.
The source of his worry: the mounting trade tensions between the
United States and China, which could hit the rest of the world
much harder than they have to date.
"Let's avoid complacency at all costs," Gurria said. "Clearly
the biggest threat is through the escalation of trade
restriction measures, and this is happening as we speak. This
clear and present danger could easily have knock-on effects."
With much of the world economy still recovering from the
after-effects of the global financial crisis a decade ago, U.S.
President Donald Trump caused alarm when he raised tariffs on
$200 billion worth of goods from China on May 10, prompting
Beijing to say it would hit back with its own higher duties.
Trade tensions are the main reason that growth in the global
economy will weaken to 3.2 percent this year, the slowest pace
in three years and down from rates of about 5 percent before the
financial crisis a decade ago, the OECD said.
MORE TARIFFS?
The world economy is expected to pick up slowly next year, but
only if Washington and China drop their latest tariff moves.
The impact could be a lot more severe if Trump follows through
on his latest threat to hit a further $300 billion of Chinese
imports with tariffs and China retaliates again.
That kind of tariff escalation, plus the associated rise in
uncertainty about a broadening of the trade war, could lop about
0.7 percent off the world economy by 2021-2022, the OECD said.
That would be equivalent to about $600 billion, or the loss of
the economy of Argentina.
But the knock-on effects might not stop there.
A full-blown trade war, combined with an ensuing debt crisis in
China and a shift away from exports to drive its economy, could
cause a 2 percent hit to China's economy, in turn knocking
global growth further, the OECD said.
To be sure, that kind of worst-case scenario may well be
averted, given the stakes for the United States and China.
Trump and Chinese President Xi Jinping are due to meet at a
Group of 20 leaders summit in Japan on June 28-29.
Other G20 nations will be urging them to step back from the
fight, chief among them Germany and Japan, two export
power-houses which have much to lose from a long trade war.
For now, the effect of the trade tensions is being felt mostly
among manufacturers.
By contrast, consumers, buoyed by low unemployment and weak
inflation in many of the world's rich economies, have shown
little sign of alarm at the row between Washington and Beijing.
But over the longer term, a protracted trade war is likely to
drag down the consumer economy too.
Global trade should normally grow at double the pace of the
world economy but is expected to lag it in 2019, boding ill for
investment by companies, the OECD said.
That investment would normally drive productivity growth, which
is key for long-term prosperity and is urgently needed. Living
standards for many workers in rich countries remain lower than
before the financial crisis of 2008-09.
The frustration with lower living standards is widely seen as
one of the main factors behind the rise of populist politics,
including Trump's presidential election victory in 2016.
"To put it bluntly, this cannot be the new normal," said
Laurence Boone, the OECD's chief economist. "We cannot accept an
economy that doesn't raise people's living standards."
(Writing by William Schomberg; Editing by Gareth Jones)
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