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OECD warns markets too optimistic as global economy peaks

[PARIS] The OECD cautioned investors that asset prices have gotten too high for a global economy that is set to peak next year and a market downturn could put the expansion at risk.

World output will probably grow 3.7 per cent in 2018, the best in years, before slowing to 3.6 per cent in 2019, the Organization for Economic Cooperation and Development said Tuesday in a semi-annual report. The US economy is set to reach its peak next year, while the euro area, Japan and China will likely slow in both 2018 and 2019, according to the report.

"Evidence continues to build that financial asset prices are inconsistent with expectations for future growth and the policy stance, exacerbating the risks of financial corrections and growth downdrafts." With the MSCI World Index up some 18 per cent this year and more than double its level of February 2009, the probability of "sharp" corrections is high, the OECD said.

US growth is predicted to accelerate in 2018, while other major economies will face slowing growth and the U.K. already is on a downward trajectory. Still, the OECD forecasts India and Brazil will buck the global trend, with GDP set to pick up through 2019.

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It may be "the peak of the cycle," OECD Chief Economist Catherine Mann said in an interview. The situation is "fragile from the standpoint of financial exposure," she said. "The expansion is insufficiently well-founded on the real side to support the expectations of youth for jobs, middle-aged people for income and old people for pensions."

Asset prices have been buoyed by loose monetary policy and may turn as that stimulus is withdrawn, Ms Mann said. While that doesn't necessarily indicate that the world will experience another financial crisis on the scale of that of 2008, it does mean that a market slump could drive a slowdown in the real economy, according to the OECD.

Worse, central banks and governments have little capacity to react to a serious downturn.

"Fiscal and monetary space are too limited to weather a financial downdraft," Ms Mann said. "That puts an even greater premium on structural policy efforts."