By Paul Hannon 

A pickup in global economic growth will prove short-lived unless governments increase spending on projects that boost productivity and push through overhauls that deal with the legacy of the financial crisis, including the problem of " zombie" firms.

That is the verdict of the Organization for Economic Cooperation and Development in its quarterly report Wednesday. The Paris-based think tank's new growth forecasts come as leading central banks prepare to wind down their stimulus measures and places the onus on politicians to take advantage of a synchronized upturn to tackle the enduring problems of insufficient investment, weak productivity and wages growth, and high levels of income inequality.

The OECD said the global economy would grow by 3.5% this year and 3.7% next, up from 3.1% in 2016. It left its growth forecasts for the U.S. unchanged, but raised its projections for both France and Italy, although it expects Germany to continue to lead the eurozone's recovery. It now expects the French economy to grow 1.7% this year and 1.6% next, while Italy is seen expanding by 1.4% and 1.2% respectively.

"Headwinds from the recent euro appreciation on activity are expected to be modest," it said.

While central banks have spent the past nine years supporting demand growth, the OECD now wants to switch the focus to policies that boost supply, or the economy's capacity to produce goods and services.

"We want to exhort policy makers to undertake reforms that are needed to ensure productivity growth is more robust going forward," said Catherline Mann, the OECD chief economist who has worked at the U.S. Federal Reserve and the Council of Economic Advisers.

Its only significant growth downgrade was to India, reflecting the impact of the new Goods and Services Tax. Even so, it still expects the Indian economy to grow by 6.7% this year and 7.2% next.

With global economic growth strengthening, central banks see less need for stimulus. Later Wednesday, the Federal Reserve is expected to announce the beginning of a years-long program to shrink its bond portfolio. The European Central Bank is likely to announce in October that it will start to reduce its monthly purchases of government bonds early in 2018. And November is likely to see the first increase in the Bank of England's key interest rate since 2007. If each delivers, it will be the first time that they have moved together to withdraw stimulus since adopting extraordinary measures to revive economies scarred by the financial crises of recent years.

Ms. Mann said central banks now need to look to the demands of financial stability, having previously privileged growth. The OECD noted signs that investors may be taking too many risks, including equity prices that are high relative to expected earnings, "compressed" yields on corporate bonds and "very low" levels of stock market volatility.

"That balance has now shifted and it's time to take the foot off the accelerator," she said.

However, the OECD warned that shrinking the huge portfolios of assets acquired by central banks since the crisis "represent a significant challenge."

"To minimize financial market volatility and global spillovers, central banks should opt to reduce their assets gradually and in a predictable way," it said.

The think tank, which provides advice to its 35 member governments, stressed that the change in focus for central banks doesn't mean the work of boosting growth has been completed. Instead, that responsibility has shifted to politicians. In addition to investment spending on education and infrastructure that boosts productivity in the long run, the OECD said it was time to pass new laws to boost dynamism, including rules that would make it easier to close down "zombie" firms.

"Strong political commitment is needed to secure robust medium-term growth and ensure its benefits are widely shared," it said.

Write to Paul Hannon at paul.hannon@wsj.com

(END) Dow Jones Newswires

September 20, 2017 05:33 ET (09:33 GMT)