According to the OECD's latest economic outlook, the global economy has started to recover, but the recovery remains weak. The Economic Outlook forecasts global GDP growth to slow from 3.3% in 2022 to 2.7% in 2023, followed by a pickup to 2.9% in 2024. Lower energy prices are easing the burden on households, business and consumer sentiment is recovering, albeit from a low base, and China's opening has boosted global economic activity.
Headline inflation in the OECD is expected to fall from 9.4% in 2022 to 6.6% in 2023 and 4.3% in 2024. The effect of tighter monetary policy, lower energy and food prices, and reduced supply constraints can be attributed for the decline in inflation.
GDP growth outlook
GDP growth in the United States is forecast to be 1.6% in 2023 before moderating to 1.0% in 2024 in response to tighter monetary policy. In the euro area, falling headline inflation will help boost real incomes and boost GDP growth from 0.9% in 2023 to 1.5% in 2024. For China, GDP growth is expected to rise sharply in 2023 (at 5.4%) and 2024 (at 5.1%) due to the government's lifting of its zero interest rate policy.
"This projected upturn, while almost unchanged from our March forecasts, reinforces the somewhat more optimistic outlook we had predicted, which is now coming to fruition," explains OECD Secretary-General Mathias Cormann.
Cormann continues to emphasize that policymakers need to bring inflation permanently down to target levels and replace broad-based fiscal stimulus with more targeted measures.
Current risks
However, the recovery is fragile. The main issues remain uncertainty about the development of the Russian war of aggression against Ukraine and its global impact. Some favorable conditions that contributed to lower energy demand last winter, such as a mild winter in Europe, may not be repeated next year.
Another risk is persistent inflation. Core inflation is proving stubborn due to strong increases in service prices and higher profits in some sectors. Tight monetary policy, while necessary, risks further increasing fiscal risks, especially in countries with high debt levels.
Financial assistance to be scaled back
Against this background, the Outlook contains a number of policy recommendations that pose significant challenges for policymakers, such as the need to lower inflation, adjust fiscal policy and promote sustainable growth.
Accordingly, restrictive monetary policy should continue until there are clear signs that inflationary pressures are easing. Financial assistance in the wake of the pandemic and the Ukraine war should be scaled back and better targeted to future needs. Broad-based energy subsidies should also be scaled back as energy prices fall and minimum wages and social benefits rise in many countries due to inflation.
"Fiscal policy should prioritize productivity-enhancing public investments, including those that drive environmental change and improve labor supply and skills," says OECD Chief Economist Clare Lombardelli.
The Outlook is also explicitly dedicated to women's economic empowerment and includes policy recommendations in this regard, including flexible work arrangements, removing disincentives in taxes and benefits, and improving access to childcare. The report emphasizes that achieving gender equality must be a high priority to promote long-term economic well-being.