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Low-growth trap set to continue; central banks creating 'market distortions', warns OECD

The world economy remains in a "low-growth trap" and weaker conditions in advanced economies will persist into 2017, the Organization for Economic Co-Operation and Development (OECD) warned on Wednesday.

In its interim economic outlook, the OECD forecast that global gross domestic product (GDP) growth is projected to remain flat at around 3 percent in 2016 "with only a modest improvement projected in 2017." It predicts global growth to expand 2.9 percent this year and 3.2 percent in 2017, lifted by China and India.

The forecast was largely unchanged since June 2016, the OECD noted, with weaker conditions in advanced economies, including the effects of the U.K.'s vote to leave the European Union (EU), "offset by a gradual improvement in major emerging market commodity producers."

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"The world economy remains in a low-growth trap with persistent growth disappointments weighing on growth expectations and feeding back into weak trade, investment, productivity and wages," it said, before detailing its concerns:

"Continued weak trade growth, and the sharp slowdown in 2015 and 2016, underlines concerns about the robustness of global growth. While demand factors play a role, weak trade also reflects structural factors and a lack of progress – together with some backtracking – on the opening of global markets to trade in goods and services. Slowing trade growth will depress productivity growth in future years."

The forecasts come as central banks in Japan, the U.S., the euro zone and the U.K. continue in their attempts to either kick-start their domestic economies or, as in the case of the U.S., at least normalize central bank policy by raising interest rates.

While the Bank of Japan announced a major policy overhaul on Wednesday in a fresh bid to boost inflation and economic growth, investors are looking ahead to a policy announcement by the U.S. Federal Reserve later Wednesday for clues on its next rate hike – widely expected to be in December.

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The Paris-based OECD, a group of 35 developed nations, said that monetary policy had "become overburdened and is creating distortions in financial markets." Like many central bankers, the OECD also called for national governments to do more in the way of fiscal policy (taxation and spending) to boost growth.

"Effective monetary policy support requires more and collective fiscal policy, as well as implementing structural reforms to boost growth and inclusiveness. Monetary policy has created a window of low interest rates. Fiscal policy should take advantage of the increase in fiscal space to increase growth-enhancing spending," the OECD noted.

"Structural reform momentum needs to be intensified, rather than continue to slow as in recent years. Trade policies are a key lever to boost growth and should be supported by measures that ensure the gains from globalization are widely shared. A more balanced policy mix would put the global economy on a higher growth path and reduce financial risks," it added.

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