Paris, France—The OECD slightly raised its growth outlook for the world economy on Wednesday as inflation eases and China has dropped Covid restrictions, but it warned the recovery faces a “long road”.
The Paris-based organization forecast an economic expansion of 2.7 percent, up from 2.6 percent in its previous report in March, with upgrades for the United States, China, and the eurozone.
But it is still under the 3.3 percent growth recorded in 2022. “The global economy is turning a corner but faces a long road ahead to attain strong and sustainable growth,” OECD chief economist Clare Lombardelli wrote in the OECD’s Economic Outlook.
“The recovery will be weak by past standards,” Lombardelli wrote.
The growth forecast for 2024 remains unchanged at 2.9 percent.
A drop in energy prices, the untangling of supply chain bottlenecks and China’s sooner-than-expected reopening are contributing to the recovery, the OECD said.
But core inflation, which strips out volatile energy and food prices, is higher than previously expected, according to the Organization for Economic Co-operation and Development.
The OECD said this may force central banks, which have already raised interest rates in efforts to tame consumer prices, to further hike borrowing costs.
“Central banks need to maintain restrictive monetary policies until there are clear signs that underlying inflationary pressures are abating,” Lombardelli said.
At the same time, the organization warned that higher interest rates around the world are “increasingly being felt”, notably in property and financial markets.
“Signs of stress have started to appear in some financial market segments as investors reassess risks, and credit conditions are tightening,” the report said.
The banking sector was rocked in March by the collapse of US regional lender SVB, whose demise was partly blamed on high rates bringing down the value of its bond portfolio.
The crisis reverberated across the Atlantic, with the Swiss government forcing Swiss banking giant UBS to take over troubled rival Credit Suisse. “Should further financial market stress arise, central banks should deploy financial policy instruments to enhance liquidity and minimize contagion risks,” Lombardelli wrote.
The OECD also warned that almost all countries have budget deficits and higher debt levels than before the pandemic as they propped up their economies to withstand the shocks of Covid restrictions and Russia’s war in Ukraine.
“As the recovery takes hold, fiscal support should be scaled back and better targeted,” Lombardelli said.
As energy prices, which soared following the Russian invasion of Ukraine, fall further, government should withdraw schemes aimed at supporting consumers, the OECD said.
The OECD raised its 2023 growth forecasts for the United States, the world’s biggest economy, to 1.6 percent and China, the second biggest, to 5.4 percent — both an increase of 0.1 percentage points.
The eurozone also got a slight 0.1-point bump to 0.9 percent. Britain was upgraded out of recession territory, with growth now forecast at 0.3 percent instead of a contraction.
The OECD, however, sharply lowered the outlook for Germany, with zero growth now expected for Europe’s economy while Japan’s GDP will grow 1.3 percent, a slight downgrade.