World economy set for weak inflation-plagued recovery, OECD says
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Major central banks face imminent decisions on whether to pause or pursue the fastest cycle of rate hikes since the 1980s.
PHOTO: REUTERS
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PARIS - The global economy is set for a weak recovery from the shocks of the Covid-19 pandemic and Russia’s war in Ukraine, dogged by persistent inflation and the restrictive policies of major central banks seeking to contain price pressures, said the Organisation for Economic Cooperation and Development (OECD).
The Paris-based body’s latest economic outlook forecasts a 2.7 per cent expansion of world output in 2023, and only a modest pickup to 2.9 per cent in 2024, both below the 3.4 per cent average in the seven years before the pandemic.
The United States, the euro area and China will see the same relative sluggishness in their recoveries, while inflation will be stronger than in the period up to the end of 2019.
The situation creates a particular headache for central banks as they must continue to react to core price pressures that are proving stronger than expected, while not overly hurting growth, OECD said.
“The global economy is turning a corner but faces a long road ahead to attain strong and sustainable growth,” said Ms Clare Lombardelli, OECD’s chief economist.
“Policymakers need to unwind the impact of a sequence of negative shocks to the global economy and face a complex set of challenges in doing so.”
The caution comes a day after the World Bank warned that the global economy is in a precarious state and heading for a substantial growth slowdown later in 2023 as interest rate increases start to bite.
Major central banks face imminent decisions on whether to pause or pursue the fastest cycle of rate hikes since the 1980s, with both the US Federal Reserve and European Central Bank scheduled to meet next week.
OECD said past hikes are increasingly feeding through – particularly in property and financial markets – but their full effect will appear only later in 2023 and 2024. Clouding the picture even further, it said there is uncertainty about the strength of that impact, while inflation could yet continue to be more persistent than expected.
“Significant uncertainty about economic prospects remains, and the major risks to the projections are on the downside,” said OECD.
Still, it urged central banks to remain restrictive, and even raise rates further if needed until there are clear signs that underlying inflationary pressure is durably reduced.
OECD said the authorities should make full use of liquidity instruments if tighter policies create market stress, and that emerging-market governments could temporarily conduct foreign exchange interventions or capital controls to avoid severe risks to stability.
To help central banks limit how much demand pressures stoke inflation, governments should make fiscal support for households more targeted to only the most vulnerable, OECD added.
Its data shows that aid to mitigate energy costs is still sizeable in Europe and mainly untargeted, which also puts pressure on public finances already bearing larger debt burdens after the Covid-19 pandemic.
“The choices for fiscal policymakers are clearer but no easier to implement, given the inherent political sensitivity of policy choices with direct redistributive effects,” said Ms Lombardelli. BLOOMBERG
