After an aggressive campaign by central banks to rein in high prices, global inflation is starting to subside and the economic outlook brightens after a period of turmoil, according to forecasts released on Thursday, but there are clouds over the recovery. is rising.
Economic recovery is progressing at uneven speeds around the world, and geopolitical tensions pose significant risks to growth and inflation, particularly if conflicts in the Middle East and attacks in the Red Sea, a critical area for trade, escalate. may bring about The Organization for Economic Co-operation and Development, a Paris-based think tank, said in its latest economic survey:
“The global economy is showing resilience, inflation has fallen within central bank targets and risks to the outlook are becoming more balanced,” Matthias Cormann, the organization’s general secretary, told a press conference in Paris on Thursday. ” āHowever, uncertainty remains.ā
Inflation in the 38 OECD countries reached 9.4% in 2022, when the energy crisis began with Russia’s invasion of Ukraine, but is expected to fall to 4.8% this year and 3.5% in 2025. Inflation rates in the United States and the euro zone are expected to fall this year and next, towards the 2% target that policymakers say is essential to maintaining price stability.
“We have been through an inflation shock for a generation,” Claire Lombardelli, the group’s chief economist, said at a briefing. He added that the biggest price increases were for essential goods such as food and energy, and that “those with the lowest incomes are being squeezed.”
Mr. Lombardelli said that while high interest rates were helping to keep prices down, there was still a risk that inflation would remain higher for longer than expected.
In the United States, the Federal Reserve kept interest rates on hold on Wednesday, citing alarm over how stubborn inflation was. Still, the OECD expects the United States to continue to be the engine of global growth this year, growing at a pace of 2.6%. But the economy will start to cool next year, with growth slowing to 1.8% as businesses and households adapt to higher borrowing costs and start reining in spending, the report said.
Europe lags far behind by comparison, as soaring energy prices have curtailed manufacturing and the cost-of-living crisis has caused consumers to cut back on spending. Both the euro zone and the UK ended 2023 in recession, exacerbated by record high interest rates introduced by the European Central Bank and the Bank of England to fight inflation.
Germany was particularly hard hit by the energy shock, but the euro zone’s economic downturn was offset to some extent by strong growth in southern European countries such as Greece and Spain. The outlook should improve next year as high interest rates fall and businesses and households spend more. The OECD expects the eurozone economy to expand by 1.5% in 2025, more than double the expected growth rate this year.
However, the UK’s growth rate is expected to remain sluggish at 0.4% in 2024, and improve to just 1% in 2025 as interest rates remain high, making it the weakest economy among the G7 countries.
In China, a boom in exports from solar panels to electric cars is supporting manufacturing and offsetting a devastating slump in the housing market, which accounts for about a quarter of the economy. A rapidly growing real estate crisis has wiped out the wealth of millions of Chinese people and has not bottomed out, prompting the government to provide economic stimulus. According to the OECD, China’s growth rate is expected to slow moderately to 4.9% in 2024 and 4.5% next year.
The group pointed to other risks, including the possibility that interest rates in large economies will need to be kept high if inflation does not cool as expected. This could create new financial vulnerabilities, especially in emerging economies where large amounts of debt are due over the next three years and may have to be carried forward at higher costs.
Against a backdrop of uncertainty, the group recommended that governments do a better job of managing the world’s growing debt. This problem is expected to worsen, especially in countries that will soon face additional spending pressures due to aging populations.