Persistent inflation and rising interest rates will weigh on global economy, says OECD

FRANKFURT, Germany (AP) — The global economy faces a precarious recovery this year and next as inflation continues to weigh on household spending and rising interest rates weigh on growth, banks and the steps.

This is what emerges Wednesday from the latest economic outlook of the Organization for Economic Cooperation and Development based in Paris. The group, made up of 38 member countries, raised its growth forecast this year to 2.7% from 2.2% estimated in November and only forecast a slight acceleration to 2.9% next year.

The rebound from the COVID-19 pandemic and soaring energy prices linked to Russia’s invasion of Ukraine is expected to be weak by past standards, with average growth of 3.4% recorded during the pre-pandemic years 2013-2019.

The road ahead is strewn with pitfalls, from Russia’s escalating war in Ukraine – with a dam collapse on Tuesday for which the sides blame each other – to debt problems in developing countries and rapid increases in interest rates with unforeseen effects on banks and investors.

“The global economy is turning the page but still has a long way to go to achieve strong and sustainable growth,” the intergovernmental organization said. “Global economic developments have started to improve, but the recovery remains fragile. ”

This is a more optimistic outlook than that given by the World Bank on Tuesday, citing similar risks in its expectation of global growth of 2.1% this year. That was still an upgrade from its January forecast of 1.7%.

Energy prices fell to pre-invasion levels, helping to cushion the worst of the recent inflation spike. But those costs are still higher than they were before Russia began massing troops on the Ukrainian border in early 2021.

Meanwhile, China’s reopening after drastic pandemic measures boosted global activity.

But core inflation, which excludes volatility in energy and food prices, is proving persistent, with some companies raising prices to boost profits and workers pushing for higher wages amid relatively low unemployment.

The OECD expects inflation to fall to 5.2% by the end of the year, from 7.8% at the end of last year in the Group of 20 countries which represent more than 80% of the world economy. The United States is expected to experience annual inflation of 3.2% by the last quarter of this year, and Europe’s rate is expected to fall to 3.5%.

These levels would provide some relief, but they are still above the 2% inflation targets of the European Central Bank and the US Federal Reserve, which have raised interest rates rapidly to fight inflation. This increases the cost of borrowing to buy homes and invest in business expansion.

The OECD has warned that while central banks are to maintain policies that restrict credit, they “must keep a watchful eye, given the uncertainties surrounding the exact impact” of the rapid hikes.

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

Countries that have spent on pandemic aid for households and businesses are already struggling with higher public debt and now have the added burden of higher costs to pay it back.

The United States and Europe can only expect timid growth.

The United States faces challenges from higher borrowing costs in rate-sensitive areas like housing construction and manufacturing. As demand slows, unemployment is expected to rise gradually to 4.5% in 2024 from 3.7% in May. With more jobs available and fewer wage increases, inflation should moderate.

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

The failure of Silicon Valley Bank and two other U.S. lenders has highlighted problems that could arise in the banking system if financial institutions suffer losses on investments like bonds, which fall in value when rates rise.

Most of the global 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 shutdowns and infrastructure spending supports a construction boom. Exports should be tempered by weak global demand.

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