The global economy has so far performed better than expected. However, inflation and developments in China remain risk factors. Now the OECD is forecasting only weak growth prospects.
The industrialized nations organization OECD sees only cautious growth prospects for the global economy in the coming year; the uncertain development in China is a risk. The Organization for Economic Cooperation and Development (OECD) stated in its economic outlook presented in Paris that developments in the first half of 2023 were better than expected.
However, the further outlook is weak, inflation is proving to be stubborn and there are significant risks.
Due to the effects of monetary policy and the unexpectedly weak recovery in China, the OECD therefore expects global economic growth of 3.0 percent for 2023 and 2.7 percent for 2024. For Germany, a minus of 0.2 percent is expected for the current year and for Growth of 0.9 percent is forecast for 2024.
For the USA, the OECD expects domestic product growth of 2.2 percent in the current year and 1.3 percent in 2024. The slowdown is the result of a slowdown in the labor market and generally the effects of more restrictive monetary policy. In the euro area, which is already suffering from weak demand, domestic product growth is expected to slow to 0.6 percent in 2023 and pick up again to 1.1 percent in 2024 when the negative effect of high inflation on real incomes subsides.
From the OECD’s perspective, it is possible that global growth will continue to surprise on the upside and inflation in major economies will fall to target levels without significant disruption to labor markets. Developments in the USA indicate this.
Various downside risks
However, the organization warns of various downside risks in its economic forecast. Inflation could remain unexpectedly stubborn, especially since further disruptions in the energy and food markets cannot be ruled out. A further slowdown in China would dampen growth worldwide and could dampen the business climate. So far, the recovery in China has been weaker than expected following the abolition of pandemic measures and the reopening of the economy. According to OECD projections, growth will be 5.1 percent this year and 4.6 percent in 2024.
The OECD warned that many countries also had high levels of national debt after extensive aid packages to deal with the corona pandemic and the energy price crisis. Governments therefore need to tighten their belts and draw up and implement credible medium-term budget plans. This is necessary to take into account growing future expenditure related to demographic change, increasing defense spending, climate change and increasing debt burdens. A more targeted use of public money could also help to cope with the climate change.
Advice on restrictive monetary policy
To counter inflation, the OECD recommends continued restrictive monetary policy until there are clear signs that inflationary pressure is easing permanently. The interest rate increases that have already taken place are now having an effect. Nevertheless, interest rates in many countries are expected to remain at or close to their current levels well into next year.
In order to stimulate growth, the industrialized nations organization is urgently calling for structural reforms. In order for economies to successfully cope with upcoming structural transformations such as the climate change and digitalization, reforms are necessary that strengthen resilience and innovative strength. Among other things, it is about reducing barriers to market access and cross-border trade and promoting competition.
Source: Stern
