Agencies
The global economy is set to navigate a challenging path to recovery this year and next, as inflation continues to hinder household spending and the impact of higher interest rates weighs on growth, banks and markets, according to a leading intergovernmental organization.
The Organisation for Economic Co-operation and Development (OECD) on Wednesday moderately upgraded its growth projections for the world economy, citing easing inflation and China’s relaxation of COVID-19 restrictions. However, the OECD cautioned that the recovery still faces a “long road.”
The Paris-based group, comprised of 38 member countries, raised its global growth forecast this year to 2.7% from an estimated 2.6% in its previous report in March. It foresaw only a tiny acceleration to 2.9% next year, according to its latest economic outlook, unchanged from March’s forecast.
The rebound from the COVID-19 pandemic and energy price spike tied to Russia’s invasion of Ukraine is likely to be weak by past standards, with an average growth of 3.4% recorded in the pre-pandemic years 2013-2019.
The path ahead is fraught with risks, from an escalation of Russia’s war in Ukraine – with a dam collapse Tuesday that the sides blamed on each other – to debt troubles in developing countries and rapid interest rate hikes having unforeseen effects on banks and investors.
“The global economy is turning a corner but faces a long road ahead to attain strong and sustainable growth,” the intergovernmental organization said. “Global economic developments have begun to improve, but the upturn remains fragile.”
It was a more optimistic outlook than the World Bank gave Tuesday, citing similar risks in its expectation for 2.1% global growth this year. That was still an upgrade from its January forecast of 1.7%.
Energy prices have fallen to pre-invasion levels, helping ease the worst of the recent outbreak of inflation. But those costs are still higher than before Russia began massing troops on Ukraine’s border in early 2021.
Meanwhile, China’s reopening after drastic pandemic measures has provided a boost to global activity.
But core inflation, which excludes volatile energy and food prices, is proving persistent as some companies raise prices to increase profits and workers push for higher wages amid relatively low unemployment.
The OECD sees inflation declining to 5.2% by year-end from 7.8% at the end of last year in the Group of 20 (G-20) countries that make up more than 80% of the global economy.
The U.S. should see annual inflation of 3.2% by the last quarter of this year, and Europe’s rate should fall to 3.5%.
Those levels would provide some relief but are still above the 2% inflation targets for the European Central Bank (ECB) and U.S. Federal Reserve (Fed), which have been rapidly raising interest rates to fight inflation. That increases the cost of borrowing to buy houses and invest in business expansion.
The OECD cautioned that while central banks need to maintain policies that restrict credit, they “must keep a watchful eye, given the uncertainties around the exact impact” of the rapid hikes.
“Signs of stress have started to appear” as higher borrowing costs slow property markets and raise concern about the impact of more expensive credit, the organization said.
Countries that spent on pandemic relief for households and businesses already are grappling with higher public debt and now have the added burden of more expensive costs to pay it down.
The United States and Europe both can expect only tepid growth.
