Fragile Global Recovery Says OECD Economic Outlook

Organisation for Economic Cooperation and Development (OECD) released its Interim Economic Outlook in March 2023. This article highilights the summary of the same chapter wise and ends with conclusion (my perspective). Let’s go into it.

It stated that there will be a fragile Global Economic recovery. Global growth slowed to 3.2% in 2022, well below expectations at the start of the year, held back by the impact of the war in Ukraine, the cost-of-living crisis, and the slowdown in China.

More positive signs have now started to appear, with business and consumer sentiment starting to improve, food and energy prices falling back, and the full reopening of China.

Growth is projected to remain moderate with inflation declining gradually

Global growth is projected to remain at below trend rates in 2023 and 2024, at 2.6% and 2.9% respectively, with policy tightening continuing to take effect. Nonetheless, a gradual improvement is projected through 2023-24 as the drag on incomes from high inflation recedes.

Annual GDP growth in the United States is projected to slow to 1.5% in 2023 and 0.9% in 2024 as monetary policy moderates demand pressures. In the euro area, growth is projected to be 0.8% in 2023, but pick up to 1.5% in 2024 as the effects of high energy prices fade. Growth in China is expected to rebound to 5.3% this year and 4.9% in 2024.

Headline inflation is declining, but core inflation is proving sticky

Headline inflation is declining, but core inflation remains elevated, held up by strong service price increases, higher margins in some sectors and cost pressures from tight labour markets.

OECD projects that inflation to be moderate gradually in 2023 and 2024. But still it will be above Central Bank objectives till second half of 2024 in many countries.

In the G20 Economies Headline inflation is expected to decline from 8.1% in 2022 to 4.5% in 2024. Whereas, in the G20 Advanced economies the core inflation is projected to an average of 4% in 2023 and 2.5% in 2024.

Downside risks predominate

OECD in its Interim Outlook stated that the outlook of global economy is still fragile. The key concern is the war in Ukraine and its consequences. Due to pressure in global energy market the global economy may face higher inflation.

As global interest rates rise, many emerging-market economies shall face increasing difficulties in increasing debt and deficits. This scenario will be visible especially in commodity-importing economies or in an economy where there is a mismatch between currency composition of liabilities and external revenues.

Policy requirements

Monetary Policy:

There is a need for tight monetary policy to continue till the inflationary pressures are lowered to greater extent. Advanced economies like the United States, the Euro Area needs to increase their interest rates. OECD expects policy rates to remain high till 2024, while core inflation slowly declines.

The wide spreading of tightening of monetary policy in many economies is likely to reduce global demand as well as prices to a greater extent.

Since Brazil, as done frontloading of policy tightening, they may allow some easing in policy interest rates in second half of 2023. Whereas, India, South Africa, Indonesia and Mexico may start lower their policy rates only in 2024.

Fiscal policy

Better targeting and timely reduction in Fiscal Support to mitigate inflation will ensure fiscal sustainability. It will preserve incentives to lower energy use, and limit additional demand stimulus during high inflation.

The targeting should be made by identifying the households and firms most in need for support. The support should include inability to renovate an energy-inefficient as well as high energy needs due to age or illness.

In general, the support must stimulate energy efficiency along with facilitating adjustments to higher energy costs, and also should avoid deterring reallocation by preserving energy-intensive activities which are not sustainable in the medium term.

Structural policy ambition needs to be rekindled

To alleviate supply constraints and to revive productivity growth it is essential to rekindle the structural reform efforts. The key steps needed to boost competition, strengthen gains from digitalization, and mitigate supply constraints, are enhancing business dynamism, developing flexible & inclusive labour markets, and lowering barriers to cross-border trade.

Climate change is among the areas where more international cooperation is needed

To overcome food & energy insecurity, to mitigate carbon efforts and also to assist low-income countries services their debts a better International cooperation is required. It is estimated by the International Energy Agency (IEA) that an annual global investment in clean energy will increase from an estimate of US$ 1.4 trillion to US$ 4½ trillion (at 2021 prices).

Conclusion – My Perspective

The OECD data shows that the global recovery will be fragile and will take only by second half of 2024. The entire report stresses on Energy efficiency and Inflation due to increase in energy prices. The policy requirement is also mainly based on energy based issues, though it mildly acknowledges the labour productivity issues across the globe. The main reason behind this energy based analysis of OECD is due to Ukrainian War and the problems which Europe is facing. However, the analysis has missed that Global economy is not only Europe or America, but it includes other continents like Asia, Africa, and Australia etc.… The economic problems are not highlighted in their most of the analysis. The OECD more often talks about better international cooperation, but it hardly does the same in its analysis. It would be better if it discusses about issues and problems which other economies, rather than only Europe & USA, are facing in their Global Economic Outlook.