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OECD Slams Loose Monetary Policy

blog | Published On 6/1/2016 2:36:30 PM by Everett Millman

Earlier this morning, we covered the highly critical view taken by the Organization for Economic Cooperation an Development (OECD) regarding the state of global economic growth. Here, we delve deeper into the biannual report issued by the Paris-based organization. What does the OECD mean when it refers to a "low-growth trap," and what factors does it cite as causing this quagmire?

"Low-Growth Trap"

In the report released on Wednesday, the OECD criticized central banks in particular for the prolonged period of economic stagnation that we've seen since the financial crisis. Due to "ultra-loose monetary policy," the OECD believes that there has been far too heavy of a reliance upon central banks to boost growth. Ultimately, the organization concludes that these policymakers are doing more harm than good.

global crashIn fact, the "low-growth trap" described by the OECD report seems to be a case of diminishing returns from the use of near-zero and even negative interest rates. In a more general sense, the report indicated "rich world governments bear the brunt of the blame for failing to revive demand and failing overhaul their economies in the wake of the financial crisis in 2008." Indeed, true structural reforms to how the major economies—and especially the financial system—function have been lacking. Instead, it's simply been business as usual, albeit amid a consistently low-interest-rate environment.

OECD Secretary-General Weighs In

Jose Angel Gurria, the chief (officially, secretary-general) of the OECD, was equally pessimistic about the outlook for the world economy over the next few years. In light of the organization's forecast for 3% global growth in 2016 and again in 2017, Gurria called it "[o]verall a rather mediocre, a rather dismal outlook."

Angel Gurria OECD Angel Gurria

Among several other issues, the world simply seems to want for demand for trade. International trade is truly the lifeblood of the economic system; when it grinds to a halt, there's little else to be happy about. While the world's advanced economies—its wealthiest nations—are struggling to find answers to the stagnation, the various emerging economies are suffering under chronically low commodity prices. Typically, when one side of this equation (developed vs. emerging markets) is down, the other is up. Unfortunately, this has not been the case since the "recovery" from the financial crisis began about seven years ago. Both sides are mired in the same "low-growth trap."

Brexit flamesAnother subject that Gurria weighed in on was the upcoming vote in the U.K. regarding the country's fate as a member of the E.U. Like most of his colleagues, Gurria urged Britons not to break their political alliance with Europe for the sake of economic considerations. While those supporting the "Leave" camp in the "Brexit" referendum charge that the warnings of negative economic consequences are overblown, the OECD estimates that a Brexit could chop off an entire month's pay from the average Briton's annual income.

The U.K. will vote on the referendum on June 23rd, about a week after the Federal Reserve Open Market Committee (FOMC) holds its next policy meeting. Most observers find it unlikely that the Fed will raise interest rates so close to a potential Brexit, the odds of such a move have been consistently rising.

 

The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.

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