Economy

OECD upgrades global growth forecast to 3.2% for 2024 as rate hikes fade and inflation falls

The Organisation for Economic Co-operation and Development (OECD) marginally increased its global growth outlook for 2024 in light of expected improvement in real incomes due to falling inflation and a more accommodative monetary policy in many economies.

The grouping, in its increased ‘Interim Economic Outlook’ released on Tuesday increased its global GDP growth forecast for 2024 to 3.2% from 3.1% previously, while leaving its forecast for 2025 unchanged at 3.2%.

OECD Secretary-General Mathias Cormann said,

“The global economy is starting to turn the corner, with declining inflation and robust trade growth. At 3.2%, we expect global growth to remain resilient both in 2024 and 2025.”

Inflation is also moderating, OECD said, with headline inflation in G20 economies projected to ease to 5.4% in 2024 and further to 3.3% by 2025.

Core inflation in G20 advanced economies is forecast to drop to 2.7% in 2024 and 2.1% in 2025.

As the lagged impact of central bank tightening evaporates, interest rate cuts would boost spending going forward while consumer spending benefitted from lower inflation, the OECD said.

If a recent decline in oil prices persists, global headline inflation could be 0.5 percentage points lower than expected over the coming year, the Paris-based OECD said.

Growth in US expected to slow, Euro area expected to recover

Growth prospects vary across major economies. In the United States, GDP growth is expected to slow to 2.6% in 2024, down from its recent rapid pace, before easing further to 1.6% in 2025.

The slowdown will likely be cushioned by monetary policy easing.

In the euro area, growth is projected to recover to 1.3% in 2025, from a low of 0.7% in 2024, driven by improvements in credit availability and rising real incomes.

China, however, faces a moderated growth outlook, with GDP expansion expected to ease to 4.9% in 2024 and 4.5% in 2025.

The country’s ongoing real estate sector correction and subdued consumer demand are seen as limiting factors, despite policy stimulus efforts.

Inflation expected to return to target levels

A key factor in the positive outlook is the projected decline in inflation.

Headline inflation in G20 economies is expected to ease significantly from 6.1% in 2023 to 5.4% in 2024 and further to 3.3% in 2025, aligning with central bank targets in most economies.

Source: OECD

However, inflationary risks persist. While food and energy prices are declining in many OECD countries, services inflation remains sticky.

“Monetary policy should remain prudent until inflation has returned to central bank targets,” Cormann cautioned, noting that rate cuts should be carefully timed based on data.

OECD warns of several downside risks

Despite the positive outlook, the OECD warns of several downside risks.

Tight monetary policies could impact demand more than anticipated, and any deviation from the expected disinflation path may trigger financial market disruptions.

Geopolitical tensions, such as the ongoing war in Ukraine and conflicts in the Middle East, also pose a risk to global stability, with the potential to reignite inflationary pressures.

On the upside, real wage growth could enhance consumer confidence and spending, while further reductions in global oil prices could accelerate disinflation.

However, these factors depend on a stable geopolitical environment.

Need for fiscal and structural reforms

In addition to managing inflation, the OECD emphasizes the importance of fiscal and structural reforms to sustain long-term growth.

Elevated public debt ratios across many economies highlight the need to rebuild fiscal space to respond to future shocks. Cormann said,

“Decisive policy action is needed to improve spending efficiency, reallocate resources to support opportunities and growth, and optimise tax revenues.”

The OECD also called for renewed structural reforms to boost medium-term growth prospects.

“The pace of regulatory reforms in recent years has been stalling,” noted Álvaro Santos Pereira, OECD chief economist.

“Amid sluggish productivity growth and tight fiscal space, product market reforms that promote open markets with healthy competitive dynamics remain a key lever to reinvigorate growth.”

With global growth projected to stay resilient, the OECD underscores the importance of prudent monetary policy and fiscal responsibility to navigate ongoing risks while capitalizing on opportunities for sustained economic recovery.

The post OECD upgrades global growth forecast to 3.2% for 2024 as rate hikes fade and inflation falls appeared first on Invezz

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