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The OECD Comes Around to Our Way of Thinking

The Organization for Economic Cooperation and Development’s (OECD) recently released global forecast wasn’t particularly encouraging. Since initially predicting a year ago that the global economy would grow 3.7% in 2015, it has now cut that outlook back to 2.9%. That said, it was in almost complete agreement with what we at Global Income Edge have been saying for months now.

The OECD trimmed its growth forecasts for both the U.S. and Europe, predicting that our economy would expand 2.4% this year and 2.5% in 2016, down from 2.6%. The euro zone will also likely gain just 1.5% this year and 1.8% next year, down from 1.6% and 1.9%. It did actually bump its 2015 forecast for China up from 6.7% to 6.8%, though it is expecting a slowdown over the next two years.

The real red flag in the report was trade. Global trade wasn’t particularly robust in 2014, growing just 3.4%. This year it has grown by just 2% though, a level typically only seen during recessions. In fact, trade has only been that slow five times in the past five decades – 1975, 1982-1983, 2001 and 2009 – and has coincided with a recession each time. To say that’s worrisome is an understatement.

But almost all of that trade slowdown is thanks to the emerging markets, which is off by more than a couple of percentage points. And almost all of that is China, though the OECD blamed that more on China’s sifting focus away from exports to a more domestically-oriented economy.

That basically means the share of growth coming from the service sector – things like health care, financial services and technology – is greater than that coming from manufacturing and extractive industries such as mining. So it’s not as though the Chinese are producing less, they’re just not manufacturing as much physical merchandise for sale to other countries.

Trade in the developed markets is still actually pretty strong, growing by about 4%.

Looking back, one of our biggest themes over the past year has been “Buy American.” By that we’ve mostly meant large multinational firms with steady businesses and stable cash flows, and that strategy has really paid off. Even in our Aggressive Portfolio, you’ll only find a couple of companies which mostly do business in the emerging markets, so we missed the worst of the turbulence in those markets over the past year.

We’ve also beaten the infrastructure drum pretty loudly over the past few months, arguing that thanks to global population growth and improving standards of living there needs to be massive spending in that arena. In fact, it’s estimated that worldwide capital project and infrastructure spending is expected to total more than $9 trillion by 2025 which, as my colleague Richard Stavros has said, will make it a new category for income investors.

I bring that up because the OECD said more infrastructure spending was part of its policy prescription to boost growth. Of course the OECD didn’t lay out how to pay for that, and a lot of countries are worried about not running up deficits, but it said that long-term economic benefit would outweigh any current costs.

While I generally don’t like to crow, it’s nice when a supranational economic think tank with a staff of hundreds of economists and analysts comes to the same conclusions you do. So as we sit down to our turkey dinner this year, we’re thankful we didn’t lay an egg and got the forecast right. We probably would have been more thankful if we hadn’t been right, though, and the economy had risen like my mother’s yeast rolls.


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