OECD raises global growth outlook as inflation eases, warns of long road

The Organisation for Economic Co-operation and Development (OECD) has marginally increased its global economic growth forecast to 2.7%, up from 2.6% in its previous report. This revision is attributed to easing inflation, China lifting Covid restrictions, falling energy prices, and supply chain improvements. However, the recovery remains below the 3.3% growth recorded in 2022, and the organisation warns of a “long road” ahead.

OECD’s Chief Economist, Clare Lombardelli, emphasised the weak nature of the recovery in the Economic Outlook report. The growth forecast for 2024 remains unchanged at 2.9%.

Contributing factors to the recovery include China’s earlier-than-expected reopening, a drop in energy prices, and the untangling of supply chain bottlenecks. However, the OECD highlighted that core inflation is higher than previously anticipated, which may force central banks to further raise interest rates to control consumer prices.

Lombardelli advised that “central banks need to maintain restrictive monetary policies until there are clear signs that underlying inflationary pressures are abating.” The report also warned of increasing stress in property and financial markets due to higher interest rates worldwide.

The banking sector experienced turbulence in March, following the collapse of US regional lender SVB, which was partially attributed to high rates reducing the value of its bond portfolio. This crisis impacted European banks, leading to the Swiss government forcing UBS to take over troubled rival Credit Suisse.

Lombardelli recommended that central banks deploy financial policy instruments to enhance liquidity and minimise contagion risks should further financial market stress arise.

The OECD also cautioned that nearly all countries have higher debt levels and budget deficits than before the pandemic, as they supported their economies through Covid restrictions and the impact of Russia’s war in Ukraine.

Lombardelli suggested that “as the recovery takes hold, fiscal support should be scaled back and better targeted.” The OECD advised that governments should withdraw consumer support schemes as energy prices continue to fall.

The 2023 growth forecasts for the United States and China, the world’s two largest economies, have been increased by 0.1 percentage points to 1.6% and 5.4% respectively. The eurozone also received a slight 0.1-point increase to 0.9%. The UK’s growth forecast has been upgraded to 0.3%, avoiding a recession.

However, the OECD significantly lowered Germany’s outlook, with zero growth expected for Europe’s economy, while Japan’s GDP growth forecast has been marginally downgraded to 1.3%, reports Bangkok Post.