According to the Organisation for Economic Co-operation and Development’s (OECD) latest Interim Economic Outlook the global economy was stronger than expected in the first half of 2023, but the growth outlook is weak, inflation is proving persistent and there are significant downside risks.
With monetary policy working its way through economies and a weaker-than-expected recovery in China, the Outlook projects global growth of 3.0% in 2023 and 2.7% in 2024.
Headline inflation has been declining, as energy and food prices have dropped, but remains above central banks’ targets in many countries. Headline inflation is projected to continue receding gradually through 2023 in G20 countries, from 7.8% in 2022 to 6.0% in 2023 and 4.8% in 2024. Core inflation remains persistent, driven by the services sector and still relatively tight labour markets, and will require central banks in many countries to maintain a restrictive stance of monetary policy.
Annual GDP growth in the United States is projected at 2.2% in 2023 and 1.3% in 2024, with the slowdown driven by cooler labour markets and more generally the effects of tighter monetary policy. In the euro area, where demand is already subdued, GDP growth is projected to ease to 0.6% in 2023, and edge up to 1.1% in 2024 as the adverse impact of high inflation on real incomes fades. China’s recovery is weaker than expected following the post-pandemic re-opening, with growth projected at 5.1% this year and 4.6% in 2024.
To confront inflation, the OECD says monetary policy should remain restrictive until there are clear signs that inflationary pressures are durably abating. As the effects of past hikes materialise, interest rates in many countries will likely need to remain at or close to their current levels into 2024.
According to the OECD, structural reforms are urgently needed to boost growth. As economies face structural transformations, including the climate and digital transitions, reforms are needed to improve resilience and innovation. This includes removing barriers to market entry and cross-border trade, promoting competition and adapting competition policies to the digital era, and enhancing skill development.