OECD warns of slowing global economy as higher interest rates bite

Global growth is expected to remain “sub-par” in 2023 and 2024 as tighter financial conditions curb demand, the Organisation for Economic Co-operation and Development (OECD) has said.

In its latest interim economic outlook, the Paris-based agency also warned “the adverse effects” of higher interest rates could prove stronger than initially expected.

“After a stronger-than-expected start to 2023, helped by lower energy prices and the reopening of China, global growth is expected to moderate,” it said.

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“The impact of tighter monetary policy is becoming increasingly visible, business and consumer confidence have turned down, and the rebound in China has faded,” it said.

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The OECD said it expected the global economy to grow by 3 per cent this year, up from the 2.7 per cent forecast in June, before slowing to 2.7 per cent next year, down from a previous projection of 2.9 per cent.

In the euro area, where demand is already subdued, economic growth is projected to ease to 0.6 per cent in 2023 before lifting to 1.1 per cent in 2024 “as the adverse impact of high inflation on real incomes fades”.

Annual growth in the US, the world’s largest economy, is expected to slow from 2.2 per cent this year to 1.3 per cent in 2024 “as tighter financial conditions moderate demand pressures” while growth in China is expected to be held back “by subdued domestic demand and structural stresses in property markets”, easing to 5.1 per cent in 2023 and 4.6 per cent in 2024.

While headline inflation is falling, it warned that core inflation remained persistent in many economies, held up by cost pressures and high margins in some sectors.

“Monetary policy needs to remain restrictive until there are clear signs that underlying inflation pressures have durably abated,” it said.

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The agency said policy interest rates were at or close to a peak in most economies, including the US and the euro area, “with policy judgments more finely balanced as the effects of higher interest rates become visible”.

Last week, the European Central Bank raised its key interest rates for a 10th consecutive time, capping off the most aggressive phase of monetary tightening ever undertaken by the bank. It signalled the increase may be the last for some time. Eurostat data published on Tuesday indicated inflation in the euro areas slowed marginally to 5.2 per cent in August from 5.3 per cent the previous month.

“Inflation is projected to moderate gradually over 2023 and 2024 but to remain above central bank objectives in most economies,” the OECD said.

There was, however, still uncertainty about the strength and speed of monetary policy transmission and the persistence of inflation.

“The adverse effects of higher interest rates could prove stronger than expected, and greater inflation persistence would require additional policy tightening that might expose financial vulnerabilities,” it said.

More generally, the OECD warned governments were facing mounting fiscal pressures from rising debt burdens and additional spending on ageing populations, the climate transition and defence.

“Enhanced near-term efforts to rebuild fiscal space and credible medium-term fiscal plans are needed to better align near-term macroeconomic policies and help ensure debt sustainability,” it said.