This OECD Economic Outlook analyses the current economic situation and examines the economic policies required to foster a sustained recovery in member countries. The present issue covers the outlook to end 2017 for both OECD countries and selected non OECD economies.

A further sharp downturn in emerging market economies and world trade has weakened global growth to around 2.9% this year – well below the long-run average – and is a source of uncertainty for near-term prospects, says the OECD.

In its latest twice-yearly Economic Outlook, the OECD projects a gradual strengthening of global growth in 2016 and 2017 to an annual 3.3% and 3.6% respectively. But a clear pick-up in activity requires a smooth rebalancing of activity in China and more robust investment in advanced economies.

Presenting the Outlook in Paris, OECD Secretary-General Angel Gurría said: “The slowdown in global trade and the continuing weakness in investment are deeply concerning.  Robust trade and investment and stronger global growth should go hand in hand. G-20 leaders meeting in Antalya need to renew their efforts to secure strong, sustainable and balanced growth.” (Read the speech)

In the US, output remains on a solid growth trajectory, propelled by household demand, with GDP expansion expected to be  2.5% next year and 2.4% in 2017.

The recovery in the euro area is set to strengthen, helped by accommodative monetary policy, lower oil prices and an easing of the pace of budget tightening. Euro area activity is expected to grow by 1.8% in 2016 and 1.9% in 2017.

In Japan, recovery was derailed in 2015 by a sharp slowdown in demand from other Asian economies and sluggish consumption. Japan’s GDP growth is expected to accelerate to 1.0% next year, but to slow to 0.5% in 2017 due to the planned consumption tax hike.

Economic growth in China is projected to slow to 6.8% in 2015 and to continue to decline gradually thereafter, reaching 6.2% by 2017, as activity rebalances towards consumption and services. Achieving this rebalancing, whilst avoiding a sharp reduction in GDP growth and containing financial stability risks, presents significant challenges.

In other emerging economies, headwinds have generally increased, reflecting weaker commodity prices, tighter credit conditions and lower potential output growth, with the risk that capital outflows and sharp currency depreciations may expose financial vulnerabilities. Brazil and Russia have experienced recessions and will not return to positive growth in annual terms until 2017. By contrast, growth prospects in India remain relatively robust, with GDP growth expected to remain over 7% in the coming years, provided further progress is made in implementing structural reforms.

The Outlook calls for greater ambition by OECD and G20 countries in supporting demand and pursuing structural reforms to boost potential growth and ensure that its economic benefits are shared by all.

It calls for policies to support short-term demand, including on-going monetary and fiscal policy support in accordance with countries’ policy space. Collective action to increase public investment is essential and would increase growth without increasing debt-to-GDP ratios.

In the run up to the COP21 UN Climate Change Conference in Paris, a special chapter of the Economic Outlook calls for unequivocal action to address climate change, which is critical for long-term economic sustainability and healthy growth.

Most climate policies could be budget-neutral and support growth. There are plenty of examples of countries that have taken action successfully without negative consequences. An effective policy stance would create a more positive environment for investment that would support growth and trade, as well as put us on a path to urgently-needed climate improvement.

The Economic Outlook also looks at the labour market and fiscal impact of the European refugee surge, and will release on Thursday, in advance of the G20 summit in Antalya, a policy note on this issue.

In addition, the Outlook includes a scenario for the global impact of weaker demand growth in China and discusses a number of other issues including: rising US policy interest rates and spill-overs to emerging market economies; growth shortfalls in the euro area and Japan; revisions to potential output growth; and the impact of an increase in public investment in OECD economies.

The OECD latest monthly Composite Leading Indicator (CLI) is also released today.

Further information about the Economic Outlook is available at http://www.oecd.org/economy/economicoutlook.htm or from the OECD’s Media Division (tel: +33 1  45 24 97 00). An online read-only version is also available.

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One in 10 homeowners younger than 40 would be underwater on their mortgages if real estate prices crashed, according to a new study that warns the country’s red-hot housing market is disproportionately putting young Canadians at financial risk.

Nearly 260,000 Canadians would see their net worth wiped out if home prices dropped 20 per cent, the study by the Canadian Centre for Policy Alternatives found. The drop in prices is larger than most bank economists are predicting, but it represents the midpoint in the Bank of Canada’s estimates that the country’s home prices are overvalued by anywhere from 10 to 30 per cent, the study’s author, economist David Macdonald, writes.

Of those homeowners pushed underwater by a major real estate crash – owing more than they have in assets – more than half would be in their 20s and 30s, the age group that has gone the deepest into debt to buy a home.

Canadians in their 30s carry debt worth an average of four times their incomes. Their debt-to-income ratio is the highest, and has risen the fastest, of any age group, Mr. Macdonald writes. Thanks to the fact that they are highly leveraged, young Canadians would see 20 per cent of their net worth wiped out for every 10-per-cent drop in home prices, so that a 20-per-cent price drop would destroy 40 per cent of their net worth.

A price drop of 30 per cent, meanwhile, would wipe out 61 per cent of the net worth of the youngest homeowners. “The most at-risk families are those who are heavily leveraged, with all their wealth in their house and who arrived late to the real estate party,” he notes.

The situation would be “dramatically worse” in high-cost cities like Toronto, Vancouver and Calgary, where young homeowners are taking on the largest mortgages, the study says.

Middle-aged homeowners in their 40s, 50s and 60s would stand to lose the most money. Mr. Macdonald estimates they will lose an average of $70,000 to $80,000, as a result of owning more expensive homes. But that would only represent 23 per cent of their net worth, given that older Canadians tend to have more equity and less debt, and have less of their net worth tied up in real estate than younger homeowners. For those in their 60s and 70s, a 20-per-cent fall in prices would mean a drop of only 10 per cent of their net worth.

Governments must prioritize helping Canadians reduce their high levels of household debt if they hope to protect young families from the devastating effects of falling home prices when mortgage rates eventually begin to rise, Mr. Macdonald writes. “We need to recognize that young families are the most likely group to be plunged underwater by a nasty housing correction,” he says. “There is still time to plan for that tidal wave.”

Federal programs introduced in the United States after the 2008 housing downturn gave unemployed homeowners the option to stop paying their mortgage for up to 12 months while they looked for a new job. Others programs allowed homeowners who were deeply underwater on their mortgages to walk away from their home with less of a hit to their credit score than a foreclosure.

A program that reduced the principal on the mortgages of struggling homeowners to reflect the new, lower value of their homes could be used to bail out Canadians in the same situation, Mr. Macdonald writes.

The U.S. Federal Housing Administration’s Refinance for Borrowers with Negative Equity program flopped south of the border in the face of resistance from mortgage insurance companies – only 4,600 out of a million eligible homeowners ultimately qualified. Such a program could benefit young homeowners here, but it would likely need buy-in from Canada Mortgage and Housing Corp. to be successful, Mr. Macdonald says.

Source: Housing price drop would sink young homeowners, study finds – The Globe and Mail