Flags of OECD countries Image Credit: File

Paris: Trade tensions and higher interest rates are slowing the global economy, though for now there are no signs of a sharp downturn, the Organisation for Economic Cooperation and Development (OECD) said on Wednesday, lowering its outlook for next year.

The OECD forecast that global growth would slow from 3.7 per cent this year to 3.5 per cent in 2019 and 2020. It had previously projected 3.7 per cent for 2019.

The global growth slowdown would be worst in non-OECD countries, with many emerging-market economies likely to see capital outflows as the US Federal Reserve gradually raised interest rates. The OECD cut its outlook for countries at risk such as Brazil, Russia, Turkey and South Africa.

Rising interest rates could also spur financial markets to reconsider and thus reprice the risks to which investors are exposed, triggering a return to volatility, the OECD said.

“We’re returning to the long-term trend. We’re not expecting a hard landing, however, there’s a lot of risks. A soft landing is always difficult,” OECD chief economist Laurence Boone told Reuters in an interview.

“This time it is more challenging than usual because of the trade tensions and because of capital flows from emerging markets to countries normalising monetary policy,” she added.

A full-blown trade war and the resulting economic uncertainty could knock as much as 0.8 per cent off global gross domestic product by 2021, the OECD calculated.

Though at the source of the current tensions, the US economy was expected to fare better than most other major economies, albeit because of costly fiscal stimulus.

Softer growth in US, China

The OECD left its forecasts for the United States in 2018 and 2019 unchanged, projecting growth in the world’s biggest economy would slow from nearly 3 per cent this year to slightly more than 2 per cent in 2020 as the impact of tax cuts waned and higher tariffs added to business costs.

Trimming its outlook for China, the OECD forecast the country’s growth would slow from 6.6 per cent to a 30-year low of 6 per cent in 2020 as authorities tried to engineer a soft landing in the face of higher US tariffs.

The outlook for the euro area was also slightly darker than in September, with growth seen slipping from nearly 2 per cent this year to 1.6 per cent in 2020 despite loose monetary policy over the period.

The Italian economy was seen slowing more than previously expected despite the expansionary budget of the populist-led government that has created friction with Brussels.

The OECD forecast Italian growth at only 1 per cent this year, lingering at 0.9 per cent in 2019 and 2020, as stalled job creation and higher inflation eroded the boost from the budget stimulus.

In Britain, the OECD forecast growth would pick up from 1.3 per cent this year to 1.4 per cent in 2019, supported by a looser budget and up from an estimate of 1.2 per cent in September.

However, after the fiscal boost peaked in 2019, growth would fall back to 1.1 per cent, the OECD said, urging the government to be prepared to respond if the economy weakened significantly due to Brexit.