This is the first edition of the OECD Business and Finance Outlook, a new annual publication that presents unique data and analysis that looks at what might affect and change, both favourably and unfavourably, tomorrow’s world of business, finance and investment. This year’s edition focuses on how companies, banks, shadow banking intermediaries and institutional investors are trying to deal with a climate of very low interest rates and structural change in the global economy.

As we emerge from the crisis that peaked with the Lehman Brothers and AIG collapses in September 2008, an environment of very low interest rates seems likely to persist over at least the medium term. This will be good for debtors but generating returns on savings will be difficult. At the same time, advanced countries must confront the challenge of providing for ageing baby-boom populations by generating and mobilising more and more resources for medical care and pensions. While pay as you go (PAYG) systems will cover basic medical care and will carry some of the burden of providing pensions, much will have to be done privately and by relying on financial intermediaries to do their share.

The first issue of the OECD Business and Finance Outlook looks at the way in which companies, banks, shadow banking intermediaries and institutional investors are trying to deal with a climate of very low interest rates and structural change in the global economy. The ‘promises’ of growth, employment and retirement income are seen to be at risk in the absence of policy actions.

This chapter presents an overview of the OECD Business and Finance Outlook 2015. It looks at the way in which companies, banks, shadow banking intermediaries and institutional investors are trying to deal with a climate of very low interest rates and structural change in the global economy. The ‘promises’ of growth, employment and retirement income are seen to be at risk in the absence of policy actions.

Following the easy monetary policies brought on by the crisis, financial markets have rallied strongly while companies that undertake capital spending do not appear to see the same value creation opportunities. Despite historically low interest rates, economic growth is stagnating in many regions due in part to the lack of investment. This is true of companies in the general industry, infrastructure and clean energy sectors. This chapter explores this puzzle from the point of view of bottom-up data of 10 000 of the world’s largest companies listed in the Bloomberg World Equity Index for both advanced and emerging countries, which enables capital spending and matching financial data to be used over the period 2002-2014.

Policies and regulatory responses to crises tend to roll financial excesses into other sectors or regions. This chapter argues that the response to the 2008 crisis has rolled the risk into the shadow banking and corporate bond sectors. Shadow banks intermediate credit between cash-rich and cash-poor investors in their bid to reuse securities and to gain access directly or synthetically to higher-yield and lower-risk alternative products in a world of low interest rates and rising longevity risk. At the root of the problem are a number of implicit promises that have been made to investors that are unlikely to be met in the absence of structural change and better regulation.

This chapter examines the potential impact of an environment of protracted low interest rates on pension systems and life insurance companies. It describes the mechanisms through which prolonged low interest rates can affect the solvency position of these institutions and uses available data to assess potential impacts.The outlook for the solvency position of pension funds and life insurance companies is of concern. Insofar as their promises are linked to evolving parameters or can be adjusted to the new environment of low interest rates, low inflation and low growth, these institutions may be able to weather the situation. However, there is a very serious concern for the financial outlook should these institutions become heavily involved in an excessive ‘search for yield’ in order to fulfil any fixed guarantee promises they may have made when interest rates were higher. Regulators and policy makers should remain vigilant.

Small and medium-sized enterprises (SMEs) play a significant role in their economies as key generators of employment and income, and as drivers of innovation and growth. They are essential for the economic recovery from the current economic and financial crisis, which has reduced bank lending and affected SMEs in particular because credit sources tend to dry up more rapidly for small firms than for large companies during economic downturns. This chapter identifies bank lending gaps that have opened up since the crisis and that are especially pertinent outside the United States. Therefore, a two-pronged approach to fostering SME financing (in as far as it is a supply problem) is proposed: first, restoring banks’ health to improve bank lending; and second, supporting the development of a broad range of non-bank financing for SMEs in debt and equity markets, the latter being especially well-suited for small dynamic, innovation-oriented SMEs. The chapter concludes that, owing to their diversity, the financing of SMEs remains complex and requires a variety of instruments and approaches. Policy makers can help by providing regulatory support and assist in the improvement of data transparency, standardisation, and raising awareness about available financing options.

This chapter examines the topic of cross-border financial flows involving multinational enterprises using data on international mergers and acquisitions and foreign direct investment. It begins with a survey of recent trends from a global and regional perspective. It then considers three factors that are shaping the outlook going forward. These are: broader economic trends, the growing involvement of governments in the governance of the global economy, and the sustainability of MNE investment from emerging market economies.

During the last ten years, corporations’ use of capital markets has changed in a number of important ways. These changes have partly been driven by macroeconomic events that have affected traditional sources of funds and shifted some of the corporate debt from traditional bank lending to corporate bonds. They may also have been influenced by regulatory changes that have contributed to a decrease in the use of public equity markets by small and medium-sized enterprises. In a low interest environment, where institutional investors are pressed to meet their client obligations, corporations have also had to respond to investor campaigns for higher dividends and share buyback programmes.

Promoting competition was declared to be a priority by the G20 in 2014, recognising that it is market competition between firms that provides them with an incentive to reduce costs and develop new and better products. The economic evidence shows that some of the most effective structural reforms to promote growth are those increasing product market competition. On the other hand the most damaging restrictions on competition often arise from protected state-owned enterprises (SOEs) or from regulatory policies that unnecessarily limit competition. Since state ownership is becoming more significant in the world economy, it is increasingly important to ensure that SOEs face similar competitive conditions, on equal terms, as do private sector firms. Identifying and redesigning the most damaging regulations can be difficult and, in many cases, politically challenging. Quantification of benefits and accounts of other countries’ experiences can help explain and gain political support for reforms. Some cases are described here.