The OECD has revised its global GDP growth forecast, modestly increasing it to 2.7%.

The OECD has revised its global GDP growth forecast, modestly increasing it to 2.7%.

June 8, 2023 87

In its latest Economic Outlook report released on Wednesday, the Organisation for Economic Co-operation and Development (OECD) announced a modest upward revision in its growth forecast for the world economy. The revised outlook reflects easing inflationary pressures and China’s relaxation of Covid restrictions. However, the OECD also cautioned that the road to recovery remains long and challenging.

According to the Paris-based organization, global economic expansion is now projected to reach 2.7 percent, up from the previous estimate of 2.6 percent stated in its March report. The United States, China, and the eurozone received upgrades in their growth expectations, contributing to the improved forecast. Despite the positive adjustment, the projected growth for 2023 still falls short of the 3.3 percent growth recorded in 2022.

Clare Lombardelli, the chief economist at the OECD, emphasized the challenges ahead, stating, “The global economy is turning a corner but faces a long road ahead to attain strong and sustainable growth.” Lombardelli also noted that the recovery would be weaker compared to previous standards.

The OECD maintained its growth forecast for 2024 at 2.9 percent, indicating a stable outlook for the coming year. Factors contributing to the recovery include a decline in energy prices, the resolution of supply chain bottlenecks, and China’s earlier-than-anticipated reopening.

Among the 38 member countries of the OECD, inflation is projected to decrease to 6.6 percent this year, following a spike to 9.4 percent in 2022. However, the report highlighted that core inflation, which excludes volatile energy and food prices, remains higher than anticipated. This development may prompt central banks, which have already raised interest rates to curb consumer prices, to further tighten monetary policies.

Lombardelli emphasized the need for central banks to maintain restrictive monetary policies until there are clear signs of abating inflationary pressures. James Pomeroy, an economist at HSBC bank, supported this approach, stating that policymakers aim to rein in inflationary pressures despite the current period of slow growth.

However, the OECD acknowledged that the impact of higher interest rates is increasingly felt, particularly in property and financial markets. The report cautioned that signs of stress have emerged in some financial segments as investors reassess risks, leading to tighter credit conditions. The recent collapse of US regional lender SVB and the subsequent takeover of troubled rival Credit Suisse by Swiss banking giant UBS were cited as examples.

The OECD recommended that central banks be prepared to deploy financial policy instruments to enhance liquidity and mitigate contagion risks in the event of further financial market stress.

The report also highlighted the persistently high budget deficits and increased debt levels in nearly all countries compared to pre-pandemic levels. Governments had implemented fiscal support measures to sustain their economies amid Covid restrictions and the geopolitical tensions caused by Russia’s war in Ukraine. As the recovery gains momentum, the OECD stressed the importance of scaling back and better targeting fiscal support.

Furthermore, as energy prices, which soared due to the Russian invasion of Ukraine, continue to decline, the OECD advised governments to phase out schemes aimed at supporting consumers.

The OECD’s growth forecasts for 2023 were revised upward for several major economies. The United States, the world’s largest economy, is now expected to grow by 1.6 percent, while China, the second-largest economy, is projected to expand by 5.4 percent. The eurozone also received a slight boost with a growth forecast of 0.9 percent. Additionally, the UK was upgraded out of recession territory, with growth now anticipated at 0.3 percent instead of a contraction. However, the outlook for Germany was sharply lowered, with zero growth expected for Europe’s largest economy, and Japan’s GDP growth was slightly downgraded to 1.3 percent.

As the world navigates the path to economic recovery, the OECD’s report serves as a reminder of the challenges that lie ahead. While there are positive developments such as easing inflation and the reopening of economies, policymakers must remain vigilant and strike a delicate balance in their efforts to sustain growth and manage potential risks in financial markets.

Swati Gupta
swati
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