Trade tensions and Brexit gloom cloud rosy outlook
Trade tensions and Brexit gloom cloud rosy outlook
While broadly more optimistic than only a few months ago, the Organization for Economic Cooperation and Development warned a trade war could threaten the outlook, and forecast that UK growth would lag all G-20 countries due to Brexit uncertainties.
Updating its outlook for the G-20, 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 US 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.
The OECD forecast the US 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.
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 than a November forecast of 1.2 percent due to the broader global improvement.
With Britain due to leave the EU 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 and 2.2 percent in 2019.
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 before easing to 1.9 percent in 2019.
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.
OPEC oil ministers gather to discuss production increase
- Analysts expect the group to discuss an increase in production of about 1 million barrels a day
- The officials were arriving in Vienna ahead of the official meeting Friday
VIENNA: The oil ministers of the OPEC cartel were gathering Tuesday to discuss this week whether to increase production of crude and help limit a rise in global energy prices.
The officials were arriving in Vienna ahead of the official meeting Friday, when they will also confer with Russia, a non-OPEC country that since late 2016 has cooperated with the cartel to limit production.
Analysts expect the group to discuss an increase in production of about 1 million barrels a day, ending the output cut agreed on in 2016.
The cut has since then pushed up the price of crude oil by about 50 percent. The US benchmark in May hit its highest level in three and half years, at $72.35 a barrel.
Upon arriving, the energy minister of the United Arab Emirates, Suhail Al Mazrouei, said: “It’s going to be hopefully a good meeting. We look forward to having this gathering with OPEC and non-OPEC.”
The 14 countries in the Organization of the Petroleum Exporting Countries make more money with higher prices, but are mindful of the fact that more expensive crude can encourage a shift to renewable resources and hurt demand.
“Consumers as well as businesses will be hoping that this week’s OPEC meeting succeeds in keeping a lid on prices, and in so doing calling a halt to a period which has seen a steady rise in fuel costs,” said Michael Hewson, chief market analyst at CMC Markets UK
The rise in the cost of oil has been a key factor in driving up consumer price inflation in major economies like the US and Europe in recent months.
Already US President Donald Trump has called on OPEC to cut production, tweeting in April and again this month that “OPEC is at it again” by allowing oil prices to rise.
Within OPEC, an increase in output will not affect all countries equally. While Saudi Arabia, the cartel’s biggest producer, is seen to be open to a rise in production, other countries cannot afford to do so. Those include Iran and Venezuela, whose industries are stymied either by international sanctions or domestic turmoil. Iran is a fierce regional rival to Saudi Arabia, meaning the OPEC deal could also influence the geopolitics in the Middle East.