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Banks

Financial system more vulnerable after Trump victory, says BoE

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Currencies

China stock market unfazed by falling renminbi

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Financial

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Categorized | Economy

Donald Trump’s infrastructure plans win backing from OECD


Posted on November 28, 2016

Donald Trump’s economic plans received strong backing from the Organisation for Economic Co-operation and Development on Monday, with the international organisation predicting the president-elect’s infrastructure plans would increase US growth, combat inequality and energise discouraged workers.

In contrast to its support for US policy, the Paris-based OECD’s twice-yearly economic outlook is cool on the UK outlook, marking down Britain’s economic prospects on the view that the UK is heading for a hard Brexit in 2019.

Equity markets have already rallied on the expectation of a boost to US growth from looser fiscal policy and the OECD’s support marks the first leading international organisation to validate financial market bets.

The OECD’s support highlights how views of US prospects have altered over the past two months. Before the US election, international financial institutions, such as the International Monetary Fund and World Bank, feared a Trump presidency and officials discussed him as a sort of Voldemort for the global economic order — like the villain in Harry Potter, his name spoken only in hushed tones and behind closed doors.

Having long been a staunch supporter of budgetary prudence, the OECD has performed a U-turn over the past year, as it has become concerned that if governments do not use low interest rates to boost capital investment, advanced economies will become stuck in a low growth trap.

Catherine Mann, chief economist of the OECD said: “We are concerned about the extent to which asset prices are underpinned by low interest rates — so monetary policy has been over-burdened and there is now a premium on getting fiscal levers pulled in the right way”.

The latest OECD forecasts in its economic outlook show improvements to growth forecasts for 2017, which are directly caused by the organisation’s positive view of US tax and public spending policy after the election.

The US is expected to be the best performing large advanced economy in 2017, growing 2.3 per cent with the eurozone growing 1.6 per cent, 1.2 per cent in the UK and only 1 per cent in Japan.

“[The Trump fiscal effect] is an important part of our projection,” Ms Mann told the FT. “We don’t think anything will happen over the next six months, but we expect [a stimulus worth] 0.25 to 0.5 per cent of national income in the second half of 2017, mostly spent on public infrastructure and 1 per cent or so in 2018 coming from tax cuts.”

The outlook says US policies might even help get the world out of a rut. More active fiscal policy, it says, “should revive expectations for faster and more inclusive growth, thus allowing monetary policy to move toward a more neutral stance in the United States at least, and possibly other countries as well”.

“The boost to [US] spending on infrastructure and other investments (such as improving skills and facilitating job-finding success through more active labour market policies and the provision of child care) will combat inequality and counter the steady decline in labour force participation rates, both by prime-age men and women,” the report says.

Amid the praise for Mr Trump’s policies, the OECD warns that if he carries out his threats to raise trade barriers, the gains would disappear. “Trade protectionism shelters some jobs, but worsens prospects and lowers wellbeing for many others,” says.

It is similar concerns that have led the organisation to double-down on its dim view of Brexit, producing forecasts based on Britain moving to trade with the rest of the EU on World Trade Organisation rules from 2019, a so-called “hard Brexit”.

“The unpredictability of the exit process from the European Union is a major downside risk for the economy. Uncertainty could hamper domestic and foreign investment more than projected and the pass-through of currency depreciation to prices could be larger, deepening the extent of stagflation,” the OECD warned.

The OECD said there was room for fiscal expansion also in Britain, Germany, France, Belgium and Russia, but recommended that China, Hungary and Israel should move to a much tighter budgetary stance.