OECD experts have warned about the risk of falls in global financial markets

In a new survey on the state of the world economy, published on 21 September, the Organization for economic cooperation and development (OECD) has downgraded its forecast for global growth in 2016 and 2017, to 2.9% and 3.2% respectively (in both cases, the forecast is deteriorated by 0.1 p. p.). In the organization noted that the world economy is still in a “low growth trap”.

The deterioration of forecasts of growth of world GDP is associated with an adverse situation in the leading economies of the world, especially in the UK. These processes negate the gradual improvement in the economies of the countries—exporters of raw materials: the OECD predicts that in Russia and Brazil to 2017 recession will slow down.

Among the factors contributing to the deceleration in global growth, the OECD calls the policy of ultra-low and negative rates. “Low interest rates are the basis of significant price increases on a wide range of assets, which increases the likelihood of a sharp correction of prices and the vulnerability [of markets]”, — stated in the report. Weak global growth prospects contrast with the high prices for assets including stocks and bonds. More than 35% of sovereign debt of OECD countries is traded with a negative yield are listed in materials to the report.

The OECD noted that the significant rise in stock prices recently occurred on the background of slowing growth of profits of non-financial sector. The organization concludes that the rise in stock prices was supported largely by the policy of low interest rates. Low interest rates also led to a rise in property prices. If the policy of ultra-low and negative rates will continue in the next couple of years, it will pose a problem of stability of the financial institutions,” the report said. Low interest rates create risks for asset managers and pension funds — their margins are falling in connection with decrease of profitability of securities of fixed income.

Another major challenge for the global economy, according to the OECD report, is a slowdown in the growth of world trade. The report States that the explosive growth of world trade, which lasted about 20 years due to the processes of globalization (the opening of new markets, the liberalization of trade laws, the establishment of common regional markets), ended with the global financial crisis. Among the reasons for this phenomenon, the OECD calls the protectionist policies in several countries, the reduction of trade turnover of China and other Asian countries and weak demand in Europe.

In order to return the world economy to average growth rates (they are about 3.75% per year), the OECD called for “decisive collective action”, the implementation of reforms in fiscal and trade policy. The OECD considers that in the conditions of the exhaustion and risks of monetary policy stimulus, States it is time to move on to the fiscal stimulus, including public investment in education and health.