OECD slightly raises world GDP growth forecast to 2.7 per cent

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 organisation forecast an economic expansion of 2.7 per cent, up from 2.6 per cent in its previous report in March, with upgrades for the United States, China and the eurozone. But it is still under the 3.3 per cent 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 per cent, the Organisation for Economic Co-operation and Development said.

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.

Among its 38 members -- an eclectic group ranging from the United States to Germany, Mexico, Japan and New Zealand -- inflation is expected to slow to 6.6 percent this year, after soaring to 9.4 percent in 2022.

But core inflation, which strips out volatile energy and food prices, is higher than previously expected, according to the OECD.

The international organisation 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. James Pomeroy, an economist at HSBC bank, said: “The period we are going through is slow growth but that’s what policy makers want to see because we are trying to rein in some of the inflationary pressures.”

At a press conference, Lombardelli said central banks faced a “delicate balance”.

“Obviously they shouldn’t tighten too much to the point that it would have a greater impact on growth than it is necessary,” said the OECD’s new chief economist, who took her post last month.

The OECD 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 minimise 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.

Oil prices edged higher on Wednesday as Saudi Arabia’s surprise weekend pledge to deepen output cuts outweighed weak Chinese export data and rising U.S. fuel stocks. Brent crude futures were up 31 cents, or 0.4%, at $76.60 a barrel at 1338 GMT, while U.S. West Texas Intermediate crude futures gained 40 cents, or 0.6%, to $72.14.

Both benchmarks jumped more than $1 on Monday after Saudi Arabia’s decision over the weekend to reduce output by 1 million barrels per day (bpd) to 9 million bpd in July.

“As things stand, the oil market is on the cusp of a massive shortfall,” said PVM Oil’s Stephen Brennock.

“Additional Saudi cuts are expected to deepen the market deficit to more than 3 million bpd in July by some estimates”.

Prices fell earlier in the session on weak Chinese economic data and rising U.S. fuel inventories.

China’s exports shrank much faster than expected in May and imports fell, albeit at a slower pace, as manufacturers struggled to find demand abroad and domestic consumption remained sluggish.

Agencies