(Bloomberg) -- The global economy faces proliferating risks ranging from trade tensions to wars and debt troubles that could threaten its “remarkable resilience” of past years, the OECD said.
Just weeks away from Donald Trump assuming the US presidency in January, the Paris-based club of rich economies applauded the world’s recent experience of stable growth and ebbing inflation, while warning that notable dangers are lurking on the horizon.
“Robust overall performance masks significant differences across regions and countries, and is surrounded by important downside risks and uncertainties,” OECD Chief Economist Alvaro Pereira wrote in the report that sees the world economy expanding 3.3% in each the next two year. “There are increasing risks related to rising trade tensions and protectionism, a possible escalation of geopolitical conflicts, and challenging fiscal policies in some countries.”
The assessment is the first by a major international economics institution detailing prospects for global growth since Trump won the Nov. 5 election on a platform whose pledges include ramping up barriers with major trading partners.
Despite the future US president’s likely impact on world affairs, the OECD doesn’t cite him once by name throughout the 267 pages of its report, limiting its commentary to the risks of fallout from possible tariffs.
“Rising trade tensions and further moves toward protectionism might disrupt supply chains, raise consumer prices, and negatively impact growth,” Pereira warned. “Similarly, an escalation of geopolitical tensions and conflicts risks disrupting trade and energy markets, potentially fueling rises in energy prices.”
Those remarks go on to highlight how decisions by politicians and central bankers may be especially consequential at present.
“Policy has a key role to play at the current juncture to manage risks and to unleash the prospects for stronger, resilient and sustainable growth,” he said. “This requires concerted action on monetary, fiscal, and structural policies.”
While the OECD’s prescription for advanced-world central banks is to keep easing, its officials also recommend a “cautious” pace to avoid disrupting inflation expectations or financial markets.
Meanwhile the organization said governments should “seize this opportune moment” to fix deteriorating public finances. Its projections anticipate that all but the most indebted members of the Group of Seven — Italy and Japan — will continue to increase borrowings as a percentage of gross domestic product.
For the OECD as a whole, that ratio will reach 117% by the end of 2026, up nine percentage points from before the pandemic, the forecasts show.
France is poised to play its own part in that increase. The report arrived on the same day that Michel Barnier’s government will face a no-confidence vote after a stand-off over its plans for public finances.
“A government budget agreement that reduces policy uncertainty could quickly reassure markets,” the OECD said. “If the budget is not adopted, political uncertainty would bear down on the recovery. Additionally, weaker-than-expected inflation and economic growth could reduce tax revenues.”
Speaking in a Bloomberg Television interview, Pereira highlighted the need to return to budgetary rigor.
“We believe very strongly that in the next few years it’s crucial to have a medium-term plan, to have fiscal discipline and to bring debt back on a downward trajectory,” he told Bloomberg’s Manus Cranny and Dani Burger. “That’s the essential part that we should focus on — independent of the government we are talking about.”
The OECD predicts a “solid pace” of growth in the US, weakening only mildly to 2.4% in 2025 — still notably faster than the rest of the G-7. It reckons Germany will expand just 0.7%, which would be the least of any member of that club.
China’s economy will decelerate to a pace of 4.4% in 2026, held back by high savings and ongoing real-estate weakness, the OECD’s economists predict.
“Risks to growth are tilted to the downside,” they said with regard to the world’s No. 2 economy. “Potential further credit events may disrupt the orderly adjustment process in the real estate sector.”
(Updates with comments from chief economist on France starting in 14th paragraph)
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