By Paul Hannon
The global economy is likely to avoid an anticipated slowdown this year, but could yet suffer a significant setback if an escalation of conflict in the Middle East were to push oil prices sharply higher, the Organisation for Economic Co-operation and Development said Thursday.
In its quarterly report on the outlook for the world economy, the Paris-based research body raised its forecasts for growth this year and next. It now expects the global output of goods and services to increase by 3.1% in 2024, having previously forecast an expansion of 2.9%, which would have marked a slowdown from 2023. It sees a pickup in growth to 3.2% in 2025.
Despite stronger-than-expected growth, the OECD said inflation is on course to fall back to the rates targeted by leading central banks, opening the way for cuts in borrowing costs later this year.
But taming the surge in inflation that followed the Covid-19 pandemic and Russia's invasion of Ukraine looks set to be achieved without a big loss of jobs, as the OECD forecast that unemployment rates will remain close to record lows in many countries.
"I wouldn't declare victory, but it's certainly happening in a less painful way than people feared, including us," said Clare Lombardelli, the OECD's chief economist.
However, the OECD warned that the brighter outlook for the global economy would be disrupted by a widening of the Middle East conflict.
Its economists calculate that if a more severe disruption to transit routes were to send oil prices 25% above the $85 a barrel assumed in their forecasts, the global economy's growth rate would be reduced by 0.4 of percentage point, while inflation rates would rise by a percentage point and central banks would raise their key interest rates by half a percentage point.
Much of the surprising strength in the global economy has come from the U.S., where the OECD now sees growth of 2.6% this year, having previously forecast an expansion of 2.1%. Partly driven by government spending, that strength has led to a series of inflation readings that were hotter than expected, but the OECD still expects the Federal Reserve to lower its key interest rate in 2024.
"We see inflation coming down and the Fed beginning to be able to loosen by the end of the year," said Lombardelli. "There is quite a lot of uncertainty."
Federal Reserve Chair Jerome Powell tried to keep the central bank's options open Wednesday by sticking with his view that interest rates are restrictive and that inflation was likely to resume its decline.
While the OECD said central banks should set rates at levels that continue to cool demand for some time, it warned that waiting too long to cut could weaken growth excessively and push inflation below target.
It forecast that the European Central Bank will lower its key rate to 2.5% by the end of next year from 4% now, while the Bank of Japan is expected to raise its key rate to 0.75% over the same period.
The OECD also raised its growth forecast for China, to 4.9% this year from 4.7% previously, in anticipation of further stimulus from the government. At a Tuesday meeting, the Communist Party's elite Politburo hinted at lowering borrowing costs further and extending new help for the property market. The government has a growth target of 5%.
"They've been very clear they are going to provide support for the economy, and that's one of the reasons we're more optimistic," said Lombardelli.
But while the global economy might be on course to emerge from the inflation surge in better shape than many had expected, the OECD said the large debts accumulated by governments during the pandemic and the inflation surge are worrying.
"Governments must address mounting debt and rising expenditure demands due to aging populations, climate change mitigation, and defense needs," said Lombardelli. "Increasing debt-service costs further worsen fiscal sustainability."
Write to Paul Hannon at paul.hannon@wsj.com
(END) Dow Jones Newswires
05-02-24 0327ET
