21 MARCH 2016, GIC Meeting at Banque de France

Catherine L. Mann OECD Chief Economist

Global Prospects

and the

Global Trade Downshift

ECOSCOPE blog: oecdecoscope.wordpress.com/

Themes

2

Stronger global growth remains elusive

Global trade downshift

Collective policy action to create virtuous cycle

Global Growth Projections

3

GDP projections: Interim Economic Outlook, Feb 18, 2016

Source: OECD Economic Outlook databases; and OECD calculations.

Projections Downgraded

5

Projections downgrades Feb 2016 vs. November 2015 Outlooks

Source: OECD Economic Outlook databases; and OECD calculations.

Sluggish Real Investment mixed projected improvement

6

Real fixed investment

1. OECD commodity exporters includes Australia, Canada, Chile, Mexico and Norway. Source: OECD November 2015 Economic Outlook database.

Projected improvement assumes

favourable structural and demand policy settings

7

Low inflation and weak wage growth

Note: Latest month available. Core inflation is for consumer prices excluding food and energy. The private consumption deflator is used for the United States. Source: OECD Economic Outlook databases.

Core inflation Compensation per employee

Global Trade Downshift Dramatic in EMEs and drags down global growth

8

Import volumes

Source: Economic Outlook database.

-15

-10

-5

0

5

10

15

%

World tradegrowth

-3

-2

-1

0

1

2

3

4

5

6

7

8

Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15

Y o Y % change

non OECD

OECD

World

Global trade volumes and GDP, USD Market exchange rates

Global Trade Downshift: Temporary or Permanent?

Demand (austerity) factors (Europe)

China slowdown, knock-on to Asia and commodities (EMEs)

Sluggish investment and GVCs

China rebalancing, on-shoring more permanent?

9

Austerity and Weak Intra-EU trade: Important post crisis but less so lately

10

Ratio of Global import volume to global GDP volume, index 2007=100

Excluding Intra-EU trade, trade/GDP ratio remains closer to its long-term

trend, but 2015 slowdown still apparent even excluding intra-EU trade

East Asia at the centre

of 2015 trade slowdown

Source: OECD Economic Outlook Database

Trade goods and services, volume

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9

10

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9

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EA15 EU27 USA JPN CHN DAE WLD

% change % change

Avg. 2011-2014 2015

Weaker import growth in China key factor in overall trade slowdown

12

China: Real GDP and import volumes

Sources: OECD Economic Outlook database.

Commodity price changes and China’s share of global consumption

Note: Commodities shown are aluminium, coal, copper, iron ore, lead, natural gas, nickel, oil, uranium and zinc. Sources: IMF; BP Statistical Review of World Energy; World Bureau of Metal Statistics.

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20Y-o-y % change

Real GDP Import volumes

Falling commodity prices; Mfg downshift

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Source: Thomson Reuters Datastream

Commodity prices

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170

190

210

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World trade prices

Manufactures

Primary commodities excluing fuels

China knock-on effects slowdowns among other EMEs

14

Note: For Korea, 2015 Q3 compared to 2014 Q3. Intensive trade with China is where merchandise exports to China were above 2% of GDP in 2014. Sources: OECD National Accounts database; IMF; UNCTAD.

Sharpest slowdowns in countries with close trade links to China and/or dependent on commodities

Change in GDP growth Y-o-y growth in 2015 Q2 compared to y-o-y growth in 2014 Q2

Rebalancing in China Permanent effect on trade growth?

15

Composition of growth in China

Note: Manufacturing (secondary) includes construction. Source: Chinese National Bureau of Statistics; People’s Bank of China; and Thomson Reuters.

China on-shoring value chain Permanent effect on trade growth?

16

China is doing less assembling, with the share of ordinary trade (i.e. domestic demand driven) picking up

0

10

20

30

40

50

60

70

1993 1997 2001 2005 2009 2013

% of goods exports

Export by custom regime

Processing and AssemblingProcessing with Imported MaterialOrdinary Trade

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10

20

30

40

50

60

70

1993 1997 2001 2005 2009 2013

% of goods imports

Import by custom regime

Processing and AssemblingProcessing with Imported MaterialOrdinary Trade

Sluggish Investment, GVCs,

and Trade Slowdown

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Length of GVCs by Industry, 2008

Emerging Markets and GVC Intensity EME poor performance accentuates slowdown

18

Source: OECD/WTO Statistics on Trade in Value Added

Value added share in GVCs of manufactured goods,

1995-2011 (%)

0

10

20

30

40

50

60

70

80

90

1995 2000 2005 2008 2009 2010 2011

USA

JPN

CHN

EU28

OECD

NONOECD

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Technology: permanent downshift?

Source: OECD (2015) Digital Economy Outlook

Global Internet Traffic

Services trade: No general downshift

20

-2

0

2

4

6

8

10

12

USA JPN DEU FRA GBR CHN

%

Trade volume growth

Goods avg 2010-2014 Goods 2015 Services avg 2010-2014 Services 2015

…

Temporary vs. permanent downshift:

openness, investment and productivity

21

22

Trade helps explain productivity spillovers

% difference in MFP productivity spill-over between max and min value of each variable across countries

Trade with the frontier measures the intensity of trade with the productivity leader by industry (Minimum Austria, Maximum : Canada)

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Trade, Investment, GVCs, Productivity

downshift vs virtuous circle

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65

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85

90

95

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Ex

po

rts

+Im

po

rts

/GD

P

Year

Openness

Trade Elas. Low(2015) (1.1)

Trade Elas. Med(2008-14) (1.4)

Trade Elas. High(1988-2007) (2.1)

100

100.5

101

101.5

102

102.5

103

103.5

104

104.5

105

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Le

ve

l

Year

Productivity

MFP Low TradeElasticity

MFP Med TradeElasticity

MFP High

Note: Calibrated with 2% real GDP growth and assuming a 4 percentage point increase in openness (imports+exports/GDP) increases productivity (MFP) by 0.8% after 5 years based on current work in the Economics Department

A drop in the elasticity of trade to GDP growth from the historical

average of 2.1 to 1.1 (observed in 2015) would result in productivity 4

percentage points lower after 20 years, all else equal.

WHAT CAN BE DONE?

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Roll back protectionist measures

25

Source: Global Trade Alert

0

100

200

300

400

500

600

2009 2010 2011 2012 2013 2014 2015

Number of discriminatory trade related measures

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 index corresponds to a 26% reduction.

Source: OECD calculations.

0.0

0.2

0.4

0.6

0.8

1.0

1.2

Product market liberalisation Two-standard-deviationreduction in global

uncertainty

1% increase in foreigndemand

1% increase in domesticdemand

2

Set the stage for more robust investment

Structural issues, sluggish demand (local and global),

and credit in the Euro area hold back investment

Focus on Regulatory Barriers in Services

27

Product Market Regulation , 2013

Services increasing are traded, are intermediates for

goods trade, and are elements of trade facilitation

Source: Going for Growth Interim Report Economic Policy Reforms, 2016

European Union Example:

Regulatory reforms, Investment, and Trade

28 Source: European Commission; Eurostat; and Fournier et al. (2015).

Juncker is less about the money and more about regulatory harmonization; limited projects reflects lack of progress on both

Juncker investment plan slow off the starting blocks

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14%

Cut in regulatory heterogeneity by 20%

Cut in regulatory stringency to align to the average ofthe top half best performers

Regulatory Reform and increase in Trade intensity within the EU

“Source: Fournier, J.-M. (2015), “The Negative Effect of

Regulatory Divergence on Foreign Direct Investment”,

OECD Economics Department Working Paper No. 1268

(forthcoming), OECD Publishing, Paris.

European Union Example

Reform finance and credit channel

29 Source: Eurostat; OECD National Accounts Database. 1. Gross non-performing debt instruments as a percentage of total debt instruments. Source: European Central Bank.

And to promote new credit creation Bank credit to non-financial corporations

Year-on-year percentage change

Deleveraging needed for financial health

Household and non-financial corporate debt

Robust Global Demand Needed Role for Collective Fiscal Action

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1st year effects of a ½ per cent of GDP public investment stimulus by all OECD economies Change from baseline

Note: Simulation using the NiGEM model, based on a two-year increase in the level of government investment equivalent to ½ per cent of GDP per annum in all OECD countries. The euro area figures are a weighted average of Germany, France and Italy. Source: OECD calculations.

Collective action, quality projects, structural policy efforts

required to realise gains to GDP and to improve debt/GDP ratios

Robust Global Demand Needed External rebalancing temporary or permanent?

31

Messages

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Stronger global growth requires collective action

• Rollback protectionism; revive pace of structural policies

• Monetary, financial policies to promote new credit/equity

• Focus fiscal policies on investment-led spending

Global trade downshift—temporary or permanent?

• China rebalancing changes GVCs

• Trade dematerialization puts premium on services reforms

• Sluggish investment is demand related

External rebalancing—temporary or not?

• Will US return to being the global buyer?

• Will China become like the US or like Germany?

• Implications for development prospects around the world

Sources

33

1. IEO

2. GfG

3. Future of productivity