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OECD Economic Outlook: Back to Supply-Side Economics?

28/11/2017

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The key message from the OECD Economic Outlook published today, is for governments to engage “renewed” and “deeper” structural reforms – trade liberalisation and de-regulation, to raise business profitability over so-called “hurdle rates”, which is estimated at no less 14%, and thereby help redress the investment gap since the 2008 crisis.

In doing so, the Economic Outlook suggests an unwelcome shift in the OECD recommendations from demand side policy to a business friendly supply side policy agenda close to a classic “trickle down” strategy. This is not warranted.

• With cyclical slack in labour markets still in place and with wage dynamics that continue to be sluggish, an incidental improvement in short term momentum does not provide for a robust basis for a supply side policy agenda.
• Channelling productivity increases into profits is a continuation of the decade long trend of decoupling of wages from productivity, of falling labour shares and rising inequalities.

One key message of the OECD Economic Outlook released on 28 November, is that economic growth is firming up to. After a meagre performance in 2016 (1.8%), OECD-wide GDP growth should reach 2.3% in 2017 and in 2018. Yet, growth is projected to level down again in 2019 to 2.1%. For the OECD, a too moderate upturn in business investments is making the economic expansion hit capacity constraints. To remove structural impediments to stronger medium term growth, the OECD therefore recommends to “creating the environment in which business investment will strengthen”, inter alia: product market reforms, liberalisation of trade and regulation, a better public spending mix and labour market measures. Supply-side economics.

Download the full assessment of the Outlook on the right hand side.