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OECD sounds pessimistic note about world economy, lowers Canadian growth estimates

PARIS – The Organization for Economic Co-operation and Development is increasingly pessimistic about the global economy, including Canada’s, and is warning that the “low-growth trap” will continue if governments don’t change tack on spending and trade.

Overall, the OECD is forecasting global growth of three per cent this year and 3.3 per cent next year. Both are down 0.3 percentage points from its November outlook.

It’s estimating Canada’s gross domestic product will grow by 1.7 per cent this year and 2.2 per cent in 2017. That’s down from the OECD’s November estimate of 2.0 per cent growth in Canadian GDP in 2016 and 2.3 per cent in 2017.

The OECD notes that Canada’s resource sector has been contracting but says the decline will slow. Activity in other parts of the economy will “gain traction,” the organization said Wednesday.

“Business investment in the oil and gas sector continues to fall sharply — it is likely to be about 60 per cent below its 2014 level in 2016 — but should be a smaller drag on growth thereafter,” OECD said in its analysis for Canada.

The OECD report was released a day after Statistics Canada reported that the national GDP grew by an annualized rate of 2.4 per cent in the first quarter of 2016, which was less than economist expectations of 2.9 per cent.

The quarter covered a period before the Alberta wildfires that shut down a significant portion of Canada’s oilsands production in May. The disruption and devastation caused by the fires, which forced the evacuation of Fort McMurray and surrounding communities, is expected to cause a short-term drag on the economy.

The Bank of Canada said last week that its preliminary assessment shows that the disaster will cut 1.25 percentage points off real GDP growth in the second quarter.

In its April monetary policy report, the bank had predicted growth at an annual rate of 1.0 per cent for the second quarter.

Among the risks to OECD’s global outlook is a potential British exit from the European Union.

The OECD reiterated its view that a so-called vote for Brexit in the country’s referendum this month “would depress growth in Europe and elsewhere substantially.”

It says the refugee surge to Europe — and a lack of a unified response — also threatens global financial stability.

Above all, the OECD said weak growth risks becoming chronic.

“This low growth trap involves a cycle in which diminished expectations become self-fulfilling,” said Angel Gurria, the OECD’s secretary-general.

According to the OECD, firms are too cautious to invest and are holding back innovation and productivity. As a result, households are getting more pessimistic about jobs and the future. The ensuing weaker consumer spending then feeds back into pessimism among companies, creating a vicious cycle.

Though the U.S. economy has improved in recent years, the next biggest economy, China, is slowing. Because it’s a major consumer of raw materials and energy, as well as being a huge exporter and increasingly important consumer, concerns have grown over the state of the world economy.

Elsewhere, the European economic recovery has failed to gain much traction while Japan remains sluggish. And emerging markets are struggling to deal with volatile currencies, high debt and the crash in prices for goods they export — Brazil and Russia, for example, are in deep recessions.

The OECD said countries have relied too much on central banks to stimulate demand and should instead look to strengthen public investment and make their economies more competitive through structural reforms.

— With files from The Associated Press.