Interest rate rises 'pose problems for global economy'

The global economy in 2018 is set for its best performance in seven years – 3.7 per cent growth in GDP – according to a report from the Organisation for Economic Cooperation and Development (OECD).

Relocate Editorial

20 September 2017

As the Organisation for Economic Cooperation and Development (OECD) predicts that the global economy in 2018 is set for its best performance in seven years, it is questioning how sustainable this expansion will be while business investment remains weak.

Possibility of interest rate rises

It is also warning that many economies face a “difficult balancing act” as central banks, including the Bank of England, move closer to interest rate rises.The OECD adhered to its earlier prediction of 3.5 per cent global growth in GDP this year but has upgraded its forecast for next year to 3.7 per cent.But it says interest rate support remains necessary to ensure the recovery is sustained. “Authorities face a difficult balancing act in continuing to provide support while managing financial stability risks,” says the report.“The long period of low interest rates has boosted asset price valuations and created financial distortions that will be testing to resolve.“In some advanced economies, including Australia, Canada, Sweden and the United Kingdom, house prices are elevated relative to rents, raising financial stability risks if rising interest rates were to trigger a housing market correction.”

Mounting inflation largely due to fall in sterling

The warning comes days after Mark Carney, governor of the Bank of England, suggested the UK's record low base rate of 0.25 per cent could be raised sooner rather than later in a period of mounting inflation, largely caused by the fall in the value of sterling since the Brexit referendum.While G20 growth for 2018 is forecast to be 3.8 per cent, the OECD is sticking by its previous forecast for UK growth in GDP of 1.6 per cent this year before dropping to just one per cent in 2018.“The major risk for the economy is the uncertainty surrounding the exit process from the European Union,” says the report. “Higher uncertainty could hamper domestic and foreign investment more than projected, but swift progress in negotiations and an outcome that retains strong trade linkages with the European Union would lead to better outcomes than projected.“The depreciation of sterling has modestly improved export prospects but also pushed up inflation, dampening purchasing power and private consumption.”

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Responding to the forecast, HM Treasury in London stated, “Our economy has grown continuously for four years and a record number of people are in work. This is a strong record but we are not complacent. We must continue our focus on restoring productivity growth which is the only sustainable way to deliver higher wages and higher living standards for people across the country.”Growth in the US is expected to be 2.1 per cent this year and 2.4 per cent next, while Chinese GDP is forecast to grow 6.7 per cent in 2017 and 6.8 per cent next year. Both Germany and France are predicted to see higher growth than the UK next year.For related news and features, visit our Enterprise section.Access hundreds of global services and suppliers in our Online Directory Get access to our free Global Mobility Toolkit

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