Global Economy at Risk From Economic Nationalism and Central Bank Policies

A modest recovery underway in the global economy is at risk from economic nationalism and diverging central bank policies, the OECD said on Tuesday as it forecast only a slight pick-up in growth.

The Paris-based Organisation for Economic Cooperation and Development estimated global economic growth would run at 3.3 percent this year before reaching 3.6 percent in 2018, unchanged from its last estimates in November.

OECD chief economist Catherine Mann said that higher interest rates in the United States could unleash damaging volatility on financial markets for some borrowers while potentially pushing the dollar higher.

"The economic nationalism is a much bigger wildcard because we don't know how the language translates into policy at this point," Mann told Reuters as the OECD updated its outlook for major economies.

U.S. President Donald Trump's campaign promises last year to put "America first" in trade, and his calls for tariffs on imports from China and Mexico, caused consternation among the United States' major trade partners.

Though Washington was not alone in using nationalistic rhetoric, Mann said the OECD had estimated that a 10 percent increase in U.S. import costs would percolate through the economy and ultimately lift export costs by 15 percent.

VOLATILE TIMES

The OECD said that with only a modest recovery in view in most countries, financial markets were becoming disconnected from economic reality as consumer spending and business investment remained weak.

With the U.S. Federal Reserve widely expected to steadily hike interest rates for some time, the OECD said that exchange rate swings could be expected.

That could put at risk emerging market borrowers who binged on cheap dollar loans in recent years, especially in countries with excessive levels of private sector debt, like China.

Updating its last forecasts for major economies, the OECD estimated the U.S. economy would grow 2.4 percent this year as domestic demand firms, up from 2.3 percent in its last forecasts from November.

U.S. growth was seen reaching 2.8 percent in 2018, down from a November estimate of 3.0 percent, as higher government spending helped offset the impact of rising interest rates and a stronger dollar.

With monetary policy relaxed and some fiscal policy easing in the euro zone, growth was seen steady this and next year at 1.6 percent, with the 2017 forecast unchanged and the 2018 forecast trimmed from 1.7 percent in November.

As rising inflation hits British consumers and businesses put investment on hold over Brexit, British growth was seen slowing from 1.6 percent this year to 1.0 percent in 2018. The OECD had forecast 2017 growth of 1.2 percent in November and its 2018 forecast was unchanged.

In Japan, fiscal easing was seen underpinning growth of 1.2 percent though the rate was seen falling back to 0.8 percent in 2018. In November, the OECD had forecast growth of 1.0 percent this year and its estimate for 2018 was unchanged.

(Reporting by Leigh Thomas; Editing by John Irish and Catherine Evans)