Global economy is flying on a wing and a prayer

Global economy is flying on a wing and a prayer

The Organisation for Economic Co-Operation and Development (OECD), in its latest update on the world economy, said the prospects for global growth have become increasingly fragile and uncertain.

It, again, reduced its growth forecasts for 2019 and 2020.

Global growth is now projected to slow from 3.6% in 2018 to 2.9% in 2019 and 3% in 2020.

These would be the weakest growth rates since the financial crisis.

A key reason for the weak performance is the downturn in manufacturing activity and associated sharp slowdown in international trade over the past year.

This reflects subdued business investment and reduced consumer spending on 'big ticket' items such as cars.

As noted by the IMF, these trends can be seen as an indication that both businesses and households are holding back on long range spending amid heightened policy uncertainty, including in relation to global trade and Brexit.

There is little doubt, either, that slowing growth in some large emerging economies, especially China, is also weighing on global activity.

Recent weak survey data are giving rise to concerns that the slowdown in economic activity could yet develop into outright recession.

Manufacturing is now contracting in virtually every major economy.

However, this sector accounts for only around 12% of output in most economies.

Thus, by itself, the downturn in industry is not a cause for outright alarm.

However, there have been signs in the latest business surveys that the weakness in manufacturing is now spreading to the much larger services sector of economies.

There was a marked weakening in the PMI services data for September in the eurozone and UK, as well as a sharp decline in the ISM services survey in the US.

The weakening of activity in the large services sector could soon start to impact labour markets and consumer spending, creating the conditions for recession to take hold.

Indeed, it would not be a surprise if both Germany and the UK have already entered a technical recession, defined as two consecutive quarters of declining output.

Global economy is flying on a wing and a prayer

Both the IMF and OECD see mounting risks to the economic outlook.

Debt levels remain high in many countries, leaving them particularly vulnerable to shocks, especially some emerging economies.

Meanwhile, concerns persist about the health of the Chinese economy, which could slow more sharply than expected.

The further escalation in global trade tensions over the summer was unwelcome given the already sharp slowdown in international trade and adds to the current heightened policy uncertainty.

Meanwhile, the OECD and IMF have both warned that a no-deal Brexit would be very costly for the UK economy and would also weigh significantly on the eurozone economy.

A sharp correction in financial markets is also a risk in this uncertain environment.

Thus, markets are becoming increasingly worried about the global economic outlook.

Stock markets have come under pressure in the past week. Bond yields have resumed their marked decline in a flight-to-quality and as markets price in even more rate cuts from central banks.

With only limited scope for monetary easing, especially in Europe, expansionary fiscal policies may well be required to stem the weakening trend in global growth.

However, with public debt still at very high levels in most countries, many governments are reluctant to go down this route, leaving the world economy flying on a wing and a prayer.

Oliver Mangan is chief economist at AIB

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