Persistent inflation, higher interest rates will weigh on global economy, OECD predicts

By AP News

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The global economy is bouncing back from an an energy price spike fed by Russia's invasion of Ukraine

Global Economy

FRANKFURT, Germany (AP) — The global economy must steer through a precarious recovery this year and next as inflation keeps dragging on household spending and higher interest rates weigh on growth, banks and markets.

That was the takeaway Wednesday from the latest economic outlook by the Paris-based Organization for Economic Cooperation and Development. The group, made up of 38 member countries, raised its growth forecast this year to 2.7% from an estimated 2.2% in November and foresaw only a tiny acceleration to 2.9% next year.

The rebound from the COVID-19 pandemic and energy price spike tied to Russia's invasion of Ukraine is likely to be weak by past standards, with average growth of 3.4% recorded in the pre-pandemic years 2013-2019.

The path ahead is fraught with risks, from escalation of Russia's war in Ukraine — with a dam collapse Tuesday that the sides blamed on each other — to debt troubles in developing countries and rapid interest rate hikes having unforeseen effects on banks and investors.

“The global economy has begun to improve," OECD Secretary-General Mathias Cormann said at a news conference. “We are projecting a recovery over 2023 and 2024. However, at this point, it is a recovery to low global growth.”

“Economic indicators are showing some improvement,” he said. “But the upturn remains fragile.”

It was a more optimistic outlook than the World Bank gave Tuesday, citing similar risks in its expectation for 2.1% global growth this year. That was still an upgrade from its January forecast of 1.7%.

Energy prices have fallen to pre-invasion levels, helping ease the worst of the recent outbreak of inflation. But those costs are still higher than they were before Russia began massing troops on Ukraine's border in early 2021.

Meanwhile, China's reopening after drastic pandemic measures has provided a boost to global activity.

But core inflation, which excludes volatile energy and food prices, is proving persistent as some companies raise prices to increase profits and workers push for higher wages amid relatively low unemployment.

The OECD sees inflation declining to 5.2% by year end from 7.8% at the end of last year in the Group of 20 countries that make up more than 80% of the global economy. The U.S. should see annual inflation of 3.2% by the last quarter of this year, and Europe's rate should fall to 3.5%.

Those levels would provide some relief but are still above the 2% inflation targets for the European Central Bank and U.S. Federal Reserve, which have been rapidly raising interest rates to fight inflation. That increases the cost of borrowing to buy houses and invest in business expansion.

The OECD cautioned that while central banks need to maintain policies that restrict credit, they “must keep a watchful eye, given the uncertainties around the exact impact" of the rapid hikes.

“Signs of stress have started to appear” as higher borrowing costs slow property markets and raise concern about the impact of more expensive credit, the organization said.

Countries that spent on pandemic relief for households and businesses already are grappling with higher public debt and now have the added burden of more expensive costs to pay it down.

The United States and Europe both can expect only tepid growth.

The U.S. is facing challenges from higher borrowing costs in rate-sensitive areas like housing construction and manufacturing. As demand slows, unemployment is expected to gradually rise toward 4.5% in 2024 — up from 3.7% in May. With more jobs available and fewer pay increases, inflation is expected to moderate.

“Nonetheless, the economic outlook could worsen if rising interest rates expose further financial fragilities,” the OECD said.

The failure of Silicon Valley Bank and two other U.S. lenders highlighted problems that could emerge in the banking system if financial institutions suffer losses on investments like bonds, whose value falls when rates go up.

Most of the globe's growth will come from Asian economies such as China, India, Indonesia and Singapore. Growth in China is expected to reach 5.4% this year and 5.1% next year as services such as tourism and entertainment recover from COVID-19 lockdowns and infrastructure spending supports a construction boom. Exports should be tempered by weak global demand.

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Author: AP News

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