Economic-Outlook-97-investment-the-way-out-of-the-b-minus-economy

Investment and the B- global
economy: how to get a better ‘grade’
Paris, 3rd June 2015
10h20 Paris time
Catherine L. Mann
OECD Chief Economist
Release of the June 2015
OECD Economic Outlook

Key messages
Global growth improving, but still moderate – the B- world economy
could do better
Monetary easing (accompanied by currency depreciation in some
countries), reduced fiscal drag and low oil prices underpin the projected
improvement
Stronger investment is needed to strengthen demand, halt the
slowdown in potential growth, improve diffusion of technology and
increase employment
Balanced packages of mutually reinforcing monetary, fiscal and
structural policies, undertaken collectively, are needed to get the strong,
inclusive, sustainable growth that would earn the world economy an A

Global growth is projected to strengthen,
though remaining below long-run averages
Real GDP growth
Per cent, seasonally adjusted annualised rate
Source: June 2015 Economic Outlook database.
Reduced fiscal
drag—except Japan
Monetary easing—
for 50% of global
GDP
Currency
depreciation—
except US
Lower oil prices –
adds 0.5% to level of
global GDP
0
1
2
3
4
5
6
7
0
1
2
3
4
5
6
7
World OECD Non-OECD
1995-2007 average

Growth projections for 2015-16
GDP
Volume, percentage change
June 2015 OECD Economic Outlook projections.
Column1 2014 2015 2016
World 3.3 3.1 3.8
United States 2.4 2.0 2.8
Euro area 0.9 1.4 2.1
Japan -0.1 0.7 1.4
China 7.4 6.8 6.7
India 7.2 6.9 7.6
Brazil 0.2 -0.8 1.1
Russia 0.6 -3.1 0.8

1. BRIIS comprises Brazil, India, Indonesia, Russia and South Africa, weighted by GDP at PPP exchange rates .
Source: November 2014 & June 2015 OECD Economic Outlook database.
Projected GDP growth, change between November 2014 and June 2015
Percentage points
Projections mostly revised down since
November Economic Outlook
-1.5 -1.0 -0.5 0.0 0.5 1.0 1.5
World
United States
Euro area
Japan
BRIIS
China
2015 2016
Upward revisionDownward revision
1

Some of the downward revision reflects
pronounced weakness in Q1 2015
Real GDP growth
Per cent, seasonally adjusted annualised rate
Source: June 2015 Economic Outlook database.
A further decline in China’s
growth rate
Surprisingly sharp Q1
slowdown in the United
States
Result: slower growth of the
world economy than in any
quarter since the crisis
-8
-4
0
4
8
12
World United States China

Low oil prices will boost consumption
and investment in the major economies
.
Estimated effect of oil price decline since mid-2014 after two years if Brent
remains at USD 65 per barrel
Impact on level of real GDP in 2016, per cent
Note: Simulation uses price difference of USD 20 per barrel relative to baseline in 2014Q3, USD 30 in 2014Q4, USD 40
in 2015Q1 and USD 35 from 2015Q2 onward.
Source: International Energy Agency; International Monetary Fund; and OECD calculations.
-1.2
-0.8
-0.4
0.0
0.4
0.8
1.2
-1.2
-0.8
-0.4
0.0
0.4
0.8
1.2
OECD net
importers
United States Non-OECD net
importers
World Non-OECD net
exporters
OECD net
exporters

Fiscal policy will exert less drag on growth
Change in underlying primary balance
Per cent of potential output
Note: BRIICS are Brazil, China, India, Indonesia, Russia and South Africa.
Source: June 2015 OECD Economic Outlook database; IMF WEO database.
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
United States Euro area Japan OECD BRIICS
2012 2013 2014 2015 2016

Widespread monetary easing in recent
months is supportive for global demand
Source: OECD calculations.
Cumulative share of world GDP of countries whose central banks
have eased monetary policy since November 2014
Per cent
0
10
20
30
40
50
60
0
10
20
30
40
50
60
Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15

Depreciation has eased financial conditions
but worsened foreign currency debt exposure
Source: June 2015 OECD Economic Outlook database.
Bilateral nominal exchange rates
(USD/domestic currency)
Percentage change between July 2014 and May 2015
Real effective exchange rates
-35 -30 -25 -20 -15 -10 -5 0
United States
China
India
United Kingdom
Canada
Mexico
Japan
Euro area
Turkey
Brazil
Russia
-20 -15 -10 -5 0 5 10 15
United States
China
India
United Kingdom
Canada
Mexico
Japan
Euro area
Turkey
Brazil
Russia

Advanced economy labour markets are
healing, though the process is incomplete
Unemployment rate
Per cent of labour force
Note: Real wages are nominal compensation per employee, deflated by corresponding CPI.
Real wages
Percentage change, seasonally adjusted
annualised rate
0
2
4
6
8
10
12
14
0
2
4
6
8
10
12
14
United States Euro area
Japan OECD -4
-3
-2
-1
0
1
2
3
4
-4
-3
-2
-1
0
1
2
3
4
United States Euro area Japan

Ordinary risks are balanced
Investment growth could again fail to accelerate,
but capital spending by cash-rich companies
could be stronger than projected.
Given uncertainty about the degree of labour
market slack, wage growth in the US and Japan
could be faster or slower than assumed.
The effect of monetary easing in the euro area
and Japan could be either stronger or weaker
than projected.
Oil prices could surprise on either side.
Economic Outlook forecast errors for GDP
Percentage points
Note: Bars show the range of one-year-ahead forecast errors
over 10 Economic Outlooks from 2009 to 2013.
-5
-4
-3
-2
-1
0
1
2
3
4
-5
-4
-3
-2
-1
0
1
2
3
4
OECD United States Euro area Japan
Average forecast error

… but there are a number of extraordinary risks
Overshooting of a rebound from exceptionally low advanced
economy bond yields
Financial turmoil in emerging market economies
Unfavourable resolution of Greece’s situation
Sharp slowdown in China

Why the world economy only rates a “B-”

Labour market remains scarred
Long-term unemployed (more than one year)
Per cent of total unemployed1
1. Three-quarter moving averages, not seasonally adjusted.
2. Not in employment, education or training.
Source: OECD calculations based on quarterly national labour force surveys.
NEET2 rates among youth
Per cent of youth population aged 15-29
0
10
20
30
40
50
60
0
10
20
30
40
50
60
United States OECD Japan Euro area
Q4 2007 Q4 2014
0
5
10
15
20
25
30
35
40
45
0
5
10
15
20
25
30
35
40
45
Japan OECD Euro
area
United
States
Mexico Turkey
2007 2014

Productivity growth has slowed
Labour productivity
Annual average percentage change over the period
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
OECD United States Euro area Japan
1980-1994 1995-2007 2008-2010 2011-2014

Investment recovery
lags previous cycles
Business investment in different cycles
Cyclical peak in OECD real business fixed investment=100
(date of peak indicated)
Sluggish investment
means:
● Slower potential output growth
● Labour scarring
● Stagnant incomes, rising
inequality
● Slower technology diffusion
from innovation frontier80
90
100
110
120
130
140
150
80
90
100
110
120
130
140
150
t 2 4 6 8 10 12 14 16 18 20 22 24 26 28
t=1973Q4 t=1981Q4
t=2000Q3 t=2008Q1
Quarters since the peak

Sluggish investment explains part of the
slowdown in potential growth
Loss in potential output relative to pre-crisis trend
Percentage point difference in 2014, relative to the counter-factual
Note: “Employment” is the combined contribution of changes in the NAIRU and the participation rate.
Source: OECD calculations based on June 2015 Economic Outlook database.
-12
-10
-8
-6
-4
-2
0
2
4
-12
-10
-8
-6
-4
-2
0
2
4
Employment Capital per worker TFP Total

Policies: getting to an “A”

Monetary policy is on track
in the major economies
Inflation expectations
2-3 years ahead, per cent
Note: Expected average annual inflation based on inflation swaps.
Source: Datastream; OECD calculations.
With below-target inflation and sub-par growth
almost everywhere, most central banks should
maintain a supportive monetary policy
Policy rates are expected to begin normalising
first in the United States, which will pose
challenges elsewhere
Swings in commodity prices and exchange rates
should trigger a policy change only if
expectations are becoming de-anchored
0.0
0.5
1.0
1.5
2.0
2.5
3.0
0.0
0.5
1.0
1.5
2.0
2.5
3.0
United States Japan Euro area

Addressing medium-term fiscal challenges
would reduce uncertainty
Public debt
Per cent of GDP
Note: For health care expenditure, averages across countries are unweighted. BRIICS are Brazil, China, India, Indonesia,
Russia and South Africa. Health care expenditure is projected with assumption that countries do not implement policies
which would reduce the expenditure.
Source: June 2015 Economic Outlook database; OECD Economic Policy Papers, No. 06, "Public spending on health and
long-term care: a new set of projections“.
Public health care expenditure pressure
Percentage deviation from 2006-10
expenditure/GDP ratio
40
60
80
100
120
140
160
180
200
220
240
40
60
80
100
120
140
160
180
200
220
240
United States
Japan
Euro area
OECD
0
1
2
3
4
5
6
7
0
1
2
3
4
5
6
7
OECD BRIICS
2030 2060

Structural policy can help to revive
investment, supporting inclusive growth
Estimated impact of shocks on investment
Percentage change after 5 years
1. 16% reduction in OECD index of regulation in energy, transport and
communications (ETCR) over 5 years, equivalent to the average pace of
reduction among 15 OECD countries during the period 1993-2013.
2. Two-standard-deviation reduction in policy uncertainty corresponds to a 26%
reduction.
Source: OECD calculations.
Diffusion of
innovationInvestment
Potential
growth
Demand, jobs
0.0
0.2
0.4
0.6
0.8
1.0
1.2
0.0
0.2
0.4
0.6
0.8
1.0
1.2
Product market
liberalisation
Two-standard-
deviation
reduction in
policy
uncertainty
1% increase in
foreign demand
1% increase in
domestic
demand
1
2

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