OECD Business and Finance Outlook 2016

image of OECD Business and Finance Outlook 2016

It is seven years since the global crisis and despite easy monetary policy, financial regulatory reform, and G20 resolutions favouring structural measures, the world economy is not making a lot of progress. Indeed, the responses to the crisis seem mainly to have stopped the banks from failing and then pushed the many faces of the crisis around between regions—currently taking the form of excess capacity in emerging markets. Productivity growth raises income per head, allows companies to pay better wages and it raises demand to help to eliminate excess capacity and improve employment. However, this element is missing in the global corporate sector. The theme of this year’s Business and Finance Outlook is fragmentation: the inconsistent structures, policies, rules, laws and industry practices that appear to be blocking business efficiency and productivity growth.


The financial markets outlook

The global economy is caught between two major headwinds: the reversal of the investment-heavy commodity supercycle; and the “L-shaped” recovery in advanced economies caused by the aftermath of the financial crisis and the interaction of re‐regulation with low and negative interest rates. The zero and even negative time value given to money is having perverse effects. Investors are being herded into concentrated and less liquid positions which work against long-term value creation and productivity growth. Normalisation of interest rates and a sustainable recovery of asset prices is shown to depend on which global scenario emerges: an “inflation first” set of policies favoured by central banks, and avoidance of a “creative destruction” phase to deal with over-investment and excess capacity in certain sectors and countries; or “productivity first” policies that bring about structural adjustment more quickly. The scenario most likely to emerge is one of continued monetary ease and choppy and sometimes volatile markets. Equities are least overvalued but cannot rise sustainably on monetary policy alone. Longer-run negative valuation adjustments are implied for some of the other most severely overvalued asset classes.



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