OECD cuts global growth outlook as investment lags, Greece looms

The Organization for Economic Cooperation and Development cut its global growth forecast, saying investment is lagging and risks including a possible Greek default are hurting confidence.

The world economy will expand 3.1 per cent this year, down from the 3.7 per cent predicted last October, the Paris-based organisation said in a semi-annual report. That compares with global growth of about 3.9 per cent a year on average in the decade through 2011. Last year, the world economy grew 3.3 per cent.

With big companies 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 organisation said.

"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 said.

The first-quarter contraction in the US, the world's largest economy, accounted for the biggest part of the 2015 forecast revision, though a softer expansion in China, the No. 2 economy, was also a factor, Mann said.

The OECD sees the US economy expanding 2 per cent this year, down from 2.4 per cent in 2014. As recently as March, it predicted US growth of 3.1 per cent in 2015. China will grow 6.8 per cent this year, down from 7.4 per cent, the OECD said.

Growth in the euro area is improving, meaning the region is making a positive contribution to growth this year, in contrast to the recent past. Spurred by unprecedented stimulus by the European Central Bank, gross domestic product in the 19-nation bloc is set to grow 1.4 per cent this year, up from 0.9 per cent in 2014, the OECD said.

"The euro zone is the bright picture," Mann said. "It is enjoying the effective policy action on the part of the ECB and the associated currency depreciation, as well as low oil prices."

Still, Europe could draw more out of the recovery by easing fiscal policy and stepping up public investment, Mann said.

Greek issue

More importantly, the region needs to resolve the impasse over Greece's public finances, which continues to weigh on confidence. A default by Greece or its exit from the euro area risks derailing the recovery.

"Failure to reach a satisfactory agreement between Greece and its official creditors would intensify perceptions of re-denomination risk and uncertainty," the OECD said. The consequences would probably include "financial fragmentation in the euro area, dampening real activity and restarting negative feedback loops between the real economy, the banking sector and public finances in vulnerable countries."

Greek Prime Minister Alexis Tsipras was due to meet European Commission President Jean-Claude Juncker in Brussels on Wednesday to discuss the details of a final proposal from creditors to break a stalemate over a financial lifeline.

Dutch Finance Minister Jeroen Dijsselbloem, who leads the euro-area group of his counterparts, meanwhile said on Tuesday an accord was still far off.

Euro area sovereign bond spreads have so far failed to react to the lack of agreement, which may "reflect a perception that the ECB measures and the stronger euro area institutional framework would contain any serious spillover effects," the OECD said. "However market sentiment could change abruptly."

GLOOMY SCENARIO

• The world economy will expand 3.1% this year, down from the 3.7% predicted last October
• Last year, the world economy grew 3.3%
• OECD sees the US economy expanding 2% this year, down from 2.4% in 2014
• China will grow 6.8% this year, down from 7.4%
• Euro zone gross domestic product is set to grow 1.4% this year, up from 0.9% in 2014