The global economy faces a precarious recovery in the coming years as inflation continues to put a strain on household spending and higher interest rates weigh on growth. The Organization for Economic Cooperation and Development (OECD), a Paris-based group of 38 countries, recently released its latest economic outlook report warning of these risks. Although the group raised its growth forecast for this year to 2.7%, it only foresees a slight increase to 2.9% for next year, marking a weak rebound from the COVID-19 pandemic and energy price spike resulting from Russia’s invasion of Ukraine.
The road ahead also remains uncertain, with risks ranging from the escalation of Russia’s war in Ukraine to developing countries’ debt troubles. The global economy may be turning a corner, but it still has a long way to go to attain strong and sustainable growth. This outlook is more optimistic than that of the World Bank, which warned of similar risks in its expectation for 2.1% global growth this year.
Energy prices are beginning to ease but are still higher than they were before Russia initiated its military buildup near the Ukrainian border earlier this year. Conversely, China’s reopening after severe pandemic measures provides a boost to global activity. Nevertheless, core inflation, excluding volatile energy and food prices, is persistent as some companies raise prices to boost their profits, and workers demand higher wages amidst relatively low unemployment.
According to the OECD, inflation in the G20 countries, which account for more than 80% of the global economy, should decline to 5.2% by the end of this year from 7.8% at the end of 2021. US inflation should reach 3.2% in the last quarter of this year, while Europe’s rate should fall to 3.5%. While these numbers provide some relief, they remain above the European Central Bank and the US Federal Reserve’s 2% inflation targets, prompting these central banks to raise interest rates to tackle inflation. However, this increases the cost of borrowing to purchase homes or invest in business expansion. The OECD warns that while central banks need to keep policies restricting credit, they should be watchful of the uncertainties around the effects of rapid hikes.
As borrowing costs rise, stress is evident in property markets, raising concerns about more costly credit, the organization cautions. Countries that spent on pandemic relief for households and businesses are already grappling with higher public debt and the burden of paying down these higher costs.
In the US and Europe, where tepid growth is likely, the US faces higher borrowing costs in rate-sensitive areas such as housing construction and manufacturing. With demand slowing, unemployment is expected to rise gradually towards 4.5% by 2024, up from 3.7% in May. As more jobs become available and fewer pay increases are given, inflation may moderate. Nonetheless, the economic outlook could worsen if rising interest rates expose further financial fragilities, warns the OECD.
The OECD expects most of the world’s growth to come from Asian economies such as China, India, Indonesia, and Singapore. China’s growth is expected to reach 5.4% this year and 5.1% next year as services like tourism and entertainment recover from COVID-19 lockdowns, and infrastructure spending supports a construction boom. Exports should be tempered by weak global demand.