The global economy is in the process of “turning a corner” as inflation fades and the drag from higher interest rates unwinds, the OECD said on Wednesday.
In its latest interim outlook, the Paris-based Organisation for Economic Co-operation and Development said real wage growth is now supporting household incomes and spending even if “purchasing power has yet to fully return to pre-pandemic levels in many countries”.
At the same time, global trade was recovering faster than expected, it said.
As a result of these positive trends, the OECD upgraded its outlook for the global economy, predicting it would grow by 3.2 per cent in 2024 and 2025, ahead of a previous estimate of 3.1 per cent, with further disinflation and less restrictive monetary policy “helping underpin demand”.
The agency warned, however, that the more positive outlook could still be cancelled out by rising geopolitical tensions, particularly in the Middle East where Israel has launched a series of military strikes on neighbouring Lebanon.
“Key near term risks include persisting geopolitical and trade tensions, the possibility of a growth slowdown as labour market pressures fade, and potential disruptions in financial markets if the projected smooth disinflation path does not materialise,” the OECD said.
Inflation is projected to be back to target in most advanced economies by the end of 2025, it said while warning cost and price pressures persist in many service sectors.
Headline inflation is projected to ease from 5.4 per cent in 2024 to 3.3 per cent in 2025 in the G20 economies. If a recent decline in oil prices persists, global headline inflation could be 0.5 percentage points lower than expected over the coming year, it said.
With inflation heading towards central bank targets, further interest rate cuts in Europe and the US can be expected.
“As inflation moderates and labour market pressures ease further, monetary policy rate cuts should continue, though the timing and scope of reductions will need to remain data-dependent and be carefully judged to ensure underlying inflationary pressures are durably contained,” it said.
Despite slower growth in France and Germany, euro zone growth is forecast to nearly double from 0.7 per cent growth this year to 1.3 per cent in 2025 as incomes grow faster than inflation.
US growth was expected to slow from 2.6 per cent this year to 1.6 per cent in 2025 though interest rate cuts would help cushion the slowdown, it said.
The Chinese economy, the world’s second-biggest, was seen slowing from 4.9 per cent in 2024 to 4.5 per cent in 2025 as government stimulus spending is offset by flagging consumer demand and a real estate rut. – Additional reporting Reuters
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