Global Economy Improving, But Growth Recovery Weak: OECD

The global economy has begun to improve, but the recovery will be weak, said the Organisation for Economic Co-operation and Development (OECD) in its latest Economic Outlook.

OECD projects a moderation of global GDP growth from 3.3% in 2022 to 2.7% in 2023, followed by a pick-up to 2.9% next year, Trade Arabia reported on July 9.

The review comes as lower energy prices start easing the strain on household budgets and businesses and consumer sentiments start recovering, albeit from low levels, as well as the boost to global activity with the reopening of China.

According to the report, the headline inflation in the OECD is projected to decline from 9.4% in 2022 to 6.6% in 2023 and 4.3% in 2024. The decline in inflation is due to tighter monetary policy taking effect, lower energy and food prices and reduced supply bottlenecks.

GDP growth in the US is projected to be 1.6% in 2023, before slowing to 1.0% in 2024 in response to tight monetary and financial conditions.

Eurozone, China to See Higher GDP

In the euro area, declining headline inflation will help to boost real incomes and contribute to a pick-up in GDP growth from 0.9% in 2023 to 1.5% in 2024. China is expected to see strong increases in GDP growth in 2023 (with 5.4%) and 2024 (with 5.1%), due to the lifting of the government’s zero-Covid policy.

OECD Secretary-General Mathias Cormann said this projected recovery, while almost unchanged from its interim projections in March, maintains the slightly more optimistic outlook that had been predicted and which now seems to materialize.

OECD in its economic outlook called upon policymakers to get inflation durably down to target and unwind broad fiscal support by better targeting fiscal measures.

"While continuing to respond to the immediate economic challenges, it remains important to prioritize structural reforms to boost productivity, including by promoting competition, reviving investment, increasing female workforce participation and alleviating supply constraints, while securing the green and digital transformations of our economies," it stated in the report. According to OECD, the persistence of inflation was another key downside risk.

"Core inflation is proving sticky, on the back of strong service price increases and higher profits in some sectors. The impact of higher interest rates is increasingly being felt across the economy, and restrictive monetary policy, while necessary, risks further exposing financial vulnerabilities, in particular in countries with high debt," it stated.

Significant Challenges

Against this backdrop, the outlook lays out a series of policy recommendations, underlining that the need to lower inflation, adjust fiscal policy and promote sustainable growth entails significant challenges for policymakers.

Monetary policy should remain restrictive until there are clear signs that underlying inflationary pressures are durably reduced.

Fiscal support, which has played a vital role in helping the global economy through the pandemic and the Ukraine crisis, should be scaled back, becoming more targeted and calibrated toward future needs.

Broad energy-related support should be withdrawn as energy prices fall and minimum wages and welfare benefits are being increased to take account of past inflation in many countries, it stated.

OECD chief economist Clare Lombardelli said: "Fiscal policy should prioritize productivity-enhancing public investments, including those driving the green transition and boosting labor supply and skills."

"Renewed reform efforts to reduce constraints in labor and product markets and to reignite private investment and productivity growth would improve sustainable living standards and strengthen the recovery from the current low growth outlook," she added.

The outlook includes a special chapter dedicated to women’s economic empowerment, setting out policy recommendations, including on expanding flexible work arrangements, addressing tax and benefit disincentives and improving access to childcare.

It highlights that removing structural barriers and discrimination to realize gender equality, must be a high priority to boost long-term economic well-being and prosperity.