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OECD warns political uncertainty, rate hikes, protectionism could derail global growth

The global economy is expected to grow around 3.5 percent in 2018 compared to 3 percent in 2016, but the modest recovery may be derailed, the Organization for Economic Cooperation and Development warned in its latest economic outlook report.

The OECD has noted that confidence has picked up but consumption, investment, trade and productivity remain weak.

"Disconnect between financial markets and fundamentals, potential market volatility, financial vulnerabilities and policy uncertainties could, however, derail the modest recovery," the OECD said in its report.

Its forecasts remained broadly unchanged from its November report, however, both the U.S. and the euro area saw minor downgrades.

The OECD is particularly concerned with political uncertainty in Europe amid rising support for anti-establishment parties.

"Uncertainties in many countries about future policy actions and the direction of politics are high," the OECD noted.

"Many countries have new governments, face elections this year or rely on coalition or minority governments. More generally, falling trust in national governments and lower confidence by voters in the political systems of many countries can make it more difficult for governments to pursue and sustain the policy agenda required to achieve strong and inclusive growth," it added.

In Europe alone, there are elections in the Netherlands, France, Germany and potentially in Italy as well – four of the biggest euro zone economies.

Furthermore, as central banks begin raising interest rates, the OECD warns that this could increases the volatility in exchange rates and lead to wider financial turmoil.

"The recent interest rate rises have been associated with sizeable exchange rate movements, with the U.S. dollar appreciating rapidly against the euro and yen, and a number of emerging market currencies have faced market pressures. Financial market expectations imply that a large divergence in short-term interest rates between the major advanced economies will open up in the coming years. This raises the risk of financial market tensions and volatility, notably in exchange rates, which could lead to wider financial instability," the OECD said.

Another big concern is the increasingly protectionist rhetoric in advanced economies. For instance, the new U.S. administration has signed orders to withdraw from some of its trade deals in an attempt to protect jobs at home.

"A rollback of existing trade openness would be costly, with a significant share of jobs in many countries linked to participation in global value chains. An increase in trade barriers in the major global trading economies – Europe, the United States and China – roughly equivalent to an average increase of tariffs to the bound tariff rates in 2001, the year when the trade negotiations under the Doha Development Round started, would have a major adverse impact on trade and GDP, particularly for those economies that imposed new trade barriers," the OECD said.