Home Business News Positive growth continues, albeit fragile and with persistent inflation posing a key risk

Positive growth continues, albeit fragile and with persistent inflation posing a key risk

by LLB Finance Reporter
19th Sep 23 10:40 am

The global economy was stronger than expected in the first half of 2023, but the growth outlook is weak, inflation is proving persistent and there are significant downside risks, according to the OECD’s latest Interim Economic Outlook.

With monetary policy working its way through economies and a weaker-than-expected recovery in China, the Outlook projects global growth of 3.0% in 2023 and 2.7% in 2024.

Headline inflation has been declining, as energy and food prices have dropped, but remains above central banks’ targets in many countries. Headline inflation is projected to continue receding gradually through 2023 in G20 countries, from 7.8% in 2022 to 6.0% in 2023 and 4.8% in 2024. Core inflation remains persistent, driven by the services sector and still relatively tight labour markets, and will require central banks in many countries to maintain a restrictive stance of monetary policy.

Annual GDP growth in the United States is projected at 2.2% in 2023 and 1.3% in 2024, with the slowdown driven by cooler labour markets and more generally the effects of tighter monetary policy. In the euro area, where demand is already subdued, GDP growth is projected to ease to 0.6% in 2023, and edge up to 1.1% in 2024 as the adverse impact of high inflation on real incomes fades. China’s recovery is weaker than expected following the post-pandemic re-opening, with growth projected at 5.1% this year and 4.6% in 2024.

“Our projections in today’s Interim Economic Outlook are broadly in line with our previous forecasts. Further significant stress in financial markets has been avoided so far, after the turbulence due to bank failures earlier in the year. That said, the global economy continues to confront the challenges of elevated inflation, low growth and comparatively weak trade,” OECD Secretary-General Mathias Cormann said.

“The priority for macroeconomic policy is to reduce inflation and re-build fiscal buffers. In parallel, in order to lay the groundwork for stronger and more sustainable growth longer term, policy action is needed to enhance competition, accelerate investment in low-carbon research and development and reduce rather than increase trade barriers.”

The Outlook highlights a range of downside risks. Inflation could continue to prove more persistent than projected, with further disruptions to energy and food markets still possible. A further slowdown in China would dampen growth in trading partners worldwide and could drag down business confidence. Public debt remains elevated in many countries, in the aftermath of significant fiscal support rolled out in response to the COVID-19 pandemic and the energy price crisis.

To confront inflation, the OECD says monetary policy should remain restrictive until there are clear signs that inflationary pressures are durably abating. As the effects of past hikes materialise, interest rates in many countries will likely need to remain at or close to their current levels into 2024.

Governments need to design and implement credible medium-term fiscal plans that recognise and respond to rising future spending needs to address ageing populations, defence, climate change and growing debt burdens. While macroeconomic policies remain restrictive, a better allocation of public resources would help address the climate transition.

Structural reforms are urgently needed to boost growth. As economies face structural transformations, including the climate and digital transitions, reforms are needed to improve resilience and innovation. This includes removing barriers to market entry and cross-border trade, promoting competition and adapting competition policies to the digital era, and enhancing skill development.

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