Downturn in the growth of the world's leading economies In February 2016 there were dramatic changes in both financial and commodity markets across the world. Central bank interest rates in some countries were at their lowest recorded level, prices of banking shares fell heavily and oil prices in New York fell to US$26.34 a barrel, the lowest in 13 years. Economists warned that the falls in share prices could indicate a downturn for economies with a possible collapse of banks, as happened in the financial crash of 2008. A healthy banking system is needed to promote economic growth. Very low interest rates undermine the profitability of commercial banks. Overproduction of oil by Saudi Arabia, the leader of the oil cartel OPEC, created price falls and deficits in the budgets of its OPEC partners that resulted in contractions in the economies of oil-exporting countries. On the other hand, oil-importing countries benefited from lower production costs although their governments claimed that revenues from sales taxes on oil products fell. Also in 2016, China's demand for oil fell because of a downturn in its economy. In 2010 China's economy grew by 10%. By 2015 the rate had fallen to 6.9%. Some critics said that China's high economic growth was enabled by the excessive borrowing of the central government to build massive infrastructure projects such as roads, offices and factories. This meant that the government owed huge amounts to banks driving them towards bankruptcy. These debts were linked to excess capacity in the construction and manufacturing industries. The Organisation for Economic Co-operation and Development (OECD) expressed concern at the state of the global economy in 2016. It criticised the over-reliance by some of the world's major economies on monetary policies based on low interest rates and quantitative easing. It argued that monetary policy cannot work alone to boost an economy and that fiscal expansion was needed to increase aggregate demand and aggregate supply. By 2016, many economies had reduced government spending and aimed at cutting budget deficits. As a result the OECD reduced its GDP growth forecasts in 2016. For example, the world average forecast growth rate was cut from 3.3% to 3.0%. Sources: 1 The Guardian, 12 February 2016 2 Reuters, February 2016 3 The Times, 13 February 2016 4 The Guardian, 19 February 2016 [Table 1.1: OECD reduction in GDP growth forecasts, 2016] Country | Reduction (%) ---|--- World average | -0.3 France | -0.1 United Kingdom (UK) | -0.3 Italy | -0.4 United States (US) | -0.5 Germany | -0.5 Canada | -0.6 Source: OECD

1. (a)What is meant by 'quantitative easing'?[3]
2. (b)Explain why 'a healthy banking system is needed to promote economic growth'.[4]
3. (c)Explain what caused the fall in the price of oil and analyse whether the evidence in the article indicates that the only cause of the economic downturn in various economies was the fall in the price of oil.[6]
4. (d)Consider the concerns and recommendations of the OECD about the state of the global economy.[7]

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