OECD calls for investment boost for growth

By bne IntelliNews June 3, 2015

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Raised investment is needed to boost a sluggish global economic recovery, the OECD said in its latest economic outlook, in which it lowers its estimate for worldwide growth in 2015-16. 

The report - Investment: the way out of the B-minus economy - suggests that while global growth should strengthen over the medium term, it will remain modest. Economic expansion is projected to pick up through 2015 to come in at 3.1%, after a very weak start to the year. Next year, growth is projected to strengthen, but only to 3.8%. Labour markets are gradually healing in the advanced economies and risks of deflation have receded, it adds.

However, the estimates are below the 3.6% and 3.9% foreseen in the previous outlook published in November 2014, largely on account of the unexpected weakness seen in the first quarter of 2015.

Meanwhile, the outlook for OECD member states lags behind, at just 1.9% and 2.5% respectively. While Eurozone forecasts have grown around 0.4pp to 1.4% and 2.1% since the autumn, thanks to bolder-than-expected monetary easing by the ECB, the stifled prospects will do little to cheer the CEE economies, many of which are highly dependent on the single currency region for export demand.

Predictibly, geo-politics (read: the Ukraine crisis and stand off between Russia and the West) and the potential for a Greek exit from the Eurozone are the big risks seen by the OECD.

However, the report concentrates on the more mundane. Although growth is underpinned by monetary policy, a reduction in fiscal consolidation, and lower oil prices, investment has yet to take off, it notes.

"Soft investment in advanced economies in recent years has gone hand in hand with the weak recovery and has reduced potential output growth. To escape this low equilibrium setting and push economies onto a higher growth path, it will be necessary to raise capital spending," the report reads.

On top of sluggish infrastructure investment, capital spending on housing dropped sharply in the crisis and is yet to recover, the OECD warns.  Such weak investment has depressed productivity growth and will, if it persists, entrench low equilibrium growth and poor job prospects in the short and longer term.

The OECD worries that low interest rates and high equity prices have had relatively little pass-through to real investment, especially in the case of countries where credit supply has been constrained by an incomplete repair of bank balance sheets. 

Meanwhile, there are issues holding back a return of sustainable investment that affect countries in CEE in particular. Uncertainty dissuades investment, the report states firmly. 

"Although by some measures, economic uncertainty has fallen over the past three years, long-standing uncertainties persist, including how population ageing and climate change will be dealt with."

In CEE, uncertainty stalks Hungary in the form of policymaking, and there are big question marks over foreign investment in the coming years. Meanwhile, although most of the region has some demographic question marks hanging over it, the Baltic states are facing potential crisis on that score.

That factor, as well as continued commitment to austerity, has also led Estonia, Latvia and Lithuania to hold back on state investment. The trio has been criticised in some quarters for their reticence in tapping the lowered borrowing costs ushered in by the ECB's QE programme to drive investment and economic growth.

The OECD insists a revival of public investment would support both demand and supply in economies, and says states are in the driving seat. 

"Increases in capital spending are needed to push economies onto a higher growth path and this calls for decisive policy actions," the report contends. "Macroeconomic policy to address deficient demand and a reduction in policy-related uncertainty need to be accompanied by structural policies that increase longer-term economic growth. Translating investment into effective and sustained growth requires attention to low-wage workers, as well as addressing the consequences of rising inequality for education, a key factor undermining potential growth in the longer term."

However, the institution is less than confident that it will see follow through. "The projected pick-up in investment could remain elusive," it admits. "On the other hand," the report continues, "investment could respond more strongly than anticipated to an upturn in spending, reduced uncertainties and recent structural reforms, particularly in the light of low financing costs."

Estonia - raise spending, lower taxes

The OECD expects Estonian GDP growth to continue to drag this year, with 2.1% forecast, on a par with 2014. The economy should pick up speed in 2016 to grow at 3.3%. Private consumption, fuelled by strong wage growth, as well as some recovery in investment, is seen in the driving seat. Exports are likely to continue to underperform because of weak growth in Estonia's main trading partners - Russia and Finland in particular. 

The report suggests Estonia's government should consider introducing lower taxes, in particular on low earners, which would raise growth by stimulating employment. This should go hand in hand with raising productivity via improving skills and knowledge transfer to Estonian companies, it added. Estonia should also take advantage of its strong fiscal position and spend more on priority areas such as education and infrastructure.

Latvia - reform and infrastructure needed

Latvian economic growth is expected to come in at 2.4% in 2015 before expanding to 3.6% in 2016, on the back of strong private consumption. As a Eurozone member, Latvia will also benefit from current monetary policy easing access to credit, the report notes. 

Weak exports and delayed pick-up in investment will remain problems, however. The business environment is hampered by complicated regulatory procedures and poor enforcement of competition law. Improving the quality of transport infrastructure and interconnectivity of energy networks to the rest of the EU is also crucial, the OECD says. 

Latvia needs to retain prudent fiscal policy in order to be able to cope with external shocks to the economy. The Latvian government should also work on better targeting of social benefits, reducing taxes on low wages, and tackling corruption in order to reduce poverty. 

Poland - challenged to raise living standards and productivity

Polish growth is projected at 3.5% in 2015 and 3.7% in 2016, supported by strengthening private consumption. The labour market is likely to improve, and exports should benefit from firmer international trade and faster growth in the Eurozone. 

After several months of deflation, consumer prices should gradually pick up again. Monetary policy should remain supportive, and it is assumed that the central bank will not start to raise interest rates before late-2016. While the European Council is likely to approve Poland's exit from the EU's Excessive Deficit Procedure in June, some further medium-term consolidation would help prepare for rising pension and health-care spending. 

Despite the overall positive picture, Poland still needs to sustain rising living standards and move to higher value-added production activities. Regulatory investment barriers need to be lifted and skills upgraded. Investment policies should be better targeted at strengthening workers' mobility, and thus productivity, as well as at greening the economy through boosting energy efficiency. 

Czech Republic - fiscal policy set to slow sprint start

With domestic demand helping Czech growth speed off the line in early 2015, and the economy looking set to maintain momentum, the OECD raises this year's growth estimate to 3.1%, a sharp revision of the 2.3% it expected in November. Renewed income growth and confidence are supporting consumer spending; public spending and an improved outlook are raising investment, the report notes. Growth is also supported by an accommodative monetary and fiscal policy.

Fiscal policy, however, is expected to tighten slightly in 2016, which leads the OECD to predict a dip in growth to 2.5%. The institution welcomes the move however, suggesting the government should take further steps to secure fiscal sustainability. It calls for the establishment of an independent fiscal council and containment of ageing-related spending.

Monetary policy will remain very expansionary to ensure that inflation moves towards the central bank's 2% target, the OECD forecasts. It expects the cap on koruna will only be lifted when deflationary risks have largely receded.

Hungary - kicking the can down the road

Like most, the OECD has raised its outlook for Hungarian growth this year dramatically, as first quarter indicators have pushed aside predictions that the economy was set to slow. The analysts now expect economic expansion at 3% in 2015; the November forecast had predicted 2.1%. However, also in line with consensus, the institution has simply kicked its prediction of a deceleration a little down the road, and it sees growth easing to 2.2% in 2016, as the stimulus to consumption and investment fades.

The economy is enjoying strong and broad-based growth going into 2015, the OECD notes. Exports are benefitting from expanded car-making capacity and improving economic conditions in main trading partners, while private consumption is supported by compensation paid by banks to clients for credit practices deemed unfair. In addition, lower oil prices and the conversion of forex mortgages into forints have further supported real incomes. 

The OECD notes also that investment growth has remained strong, but that it is decelerating, as the surge in EU-funded public investment will soon run its course. At the same time, investment in mainly non-tradable sectors, such as energy and retail, remain hampered by restrictive and frequently changing regulation.

Monetary and fiscal policy remains supportive, it adds, but structural reforms are needed. The government's commitment to lower the bank tax and provide a better operating environment for the sector is welcome. However, Budapest should lower high tax on low salaries in a bid to bolster job creation and make growth more inclusive. 

Slovakia - more work to do on fiscal consolidation

Slovak economic growth should strengthen to 3% this year from 2.4% in 2014, and accelerate to 3.4% in 2016 on the back of stronger domestic demand and exports. The forecast raises the 2015 outlook put forward by the OECD in November, when it predicted growth of 2.8%. The outlook remains unchanged for next year. 

Private consumption should continue to recover, the report forecasts, reflecting stronger household confidence, rising real salaries and a stronger labour market. Moreover, the economy now looks likely to benefit more from exports than previously thought thanks to a stronger recovery of the country's trading partners and euro depreciation. 

The OECD sees Slovakia's public debt close to the 55% constitutional ceiling and warns that this will require further consolidation efforts. General government debt is seen at 53.5% of GDP both this year and in 2016.

Slovenia - recovery remains fragile

The OECD lifted Slovenia’s 2015 GDP growth forecast to 2.1% from the previous 1.8%, but this still means the expansion is expected to slow down from last year’s 2.6%.

The OECD said that despite the surprising growth last year and the positive expectations for 2015, Slovenia’s economic recovery remains fragile from the recession in 2012-2013 when the country’s banking sector was  hit by the financial crisis.

“Corporate investment remains low and banks’ capacity to lend is constrained by still high non-performing loans and risk aversion,” the report said.

“A key priority is smooth and swift corporate restructuring and reducing non-performing loans,” the report said. “Fiscal slippage in structural terms should be avoided but automatic stabilisers should be allowed to operate fully.”

Turkey - downward risks

The OECD cut its GDP growth forecast for Turkey to 3.1% from a previous 3.2% and downgraded the 2016 forecast to 3.9% from a previous 4.2%.

Downward risks arise from post-election uncertainties and regional geopolitical conditions, notably in Iraq and Syria, according to the OECD, which also underlines that a deterioration in domestic and international confidence might heighten financial tensions and hold back investment and growth.

The implementation of key product and labour market reforms would spur growth, said the OECD in the report. Against the backdrop of large foreign financing needs and volatile capital flows, inflation will need to be brought down, said the OECD. 

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