America’s economy wasn’t the only one to hit the skids early this year.
In its forecast for the world economy released Wednesday, the Organization for Economic Cooperation and Development found that global growth during the first quarter was the weakest at any point since the crisis. The organization now predicts the global economy will expand at an annual rate of 3.1 percent — much slower than the 4 percent rate it had forecast just a few months ago. It counts among the culprits the sharp deceleration in the American economy, disappointing progress in China and Japan and a worldwide shortfall of capital investment.
The new report minces no words in expressing the frustration with the sputtering recovery felt by policymakers and ordinary households.
“We give the global economy only the barely passing grade of B-,” the report states. “The failure to achieve a stronger cyclical upswing has had very real costs in terms of foregone employment, stagnant living standards in advanced economies, less vigorous development in some emerging economies, and rising inequality nearly everywhere.”
How seriously to take the slowdown during the first half of the year in the U.S. and elsewhere is key point of contention among policymakers. After all, all signs had pointed to a breakout year: Robust hiring in the United States, falling oil prices that would put money directly in shoppers’ wallets around the world, a fresh flood of central bank stimulus in Europe to combat the threat of deflation.
In a recent speech, Federal Reserve Chair Janet Yellen argued that the U.S. economy is still well-positioned for growth. The central bank’s official stance is that many of the factors that made the first half the year so lousy are “transitory.”
But what if they aren’t? Falling unemployment in the U.S. has not translated into faster economic growth. Consumers have not spent what they’ve saved at the pump. The threat of a Greek debt default once again looms over Europe. The OECD’s report is one sign that global policymakers are seriously rethinking the narrative.
“Even if we are right about the transitory nature of the latest bout of weak growth, the outlook is not satisfactory,” the report said.
The OECD report is also a reminder of how tightly knit the global economy has become: Easy money policies in the Euro area designed to jolt the region out of the economic doldrums were unleashed at the same time that oil prices were plummeting. That helped push up the dollar, dampen exports and chip away at U.S. growth — which, in turn, results in depressed global demand.
In remarks earlier this week, Fed Gov. Lael Brainard said that if a stronger dollar ushers in tighter financial conditions, the central bank should move more slowly in tightening the screws of the American economy.
“The notable effects of recent crosscurrents from abroad should lay to rest any remaining lore that the United States is a closed economy,” she said. “Financial linkages between the United States and foreign economies are immediate and extensive.”
Translation: We’re all in this together — which means no one can afford a mistake.