© Reuters. FILE PHOTO: An employee works on the production line of a tyre factory under Tianjin Wanda Tyre Group, which exports its products to countries such as U.S. and Japan, in Xingtai, Hebei province, China May 21, 2019. REUTERS/Jason Lee
By Leigh Thomas
PARIS (Reuters) – The global economic outlook has improved from a few months ago as the inflation shock eases but rising interest rates will keep risks high, the OECD said on Friday, hiking its growth forecasts for major economies.
After growth last year of 3.2%, the world economy is on course to expand 2.6% as central bank tightening takes full effect, the Organisation for Economic Cooperation and Development said in its interim economic outlook.
The Paris-based organisation raised its forecast for global growth from 2.2% in its last Economic Outlook in November, citing a decline in energy and food prices and China’s easing of its anti-COVID restrictions.
Looking to next year, global growth was expected to accelerate to 2.9% – compared with a November forecast of 2.7% – as the hit to household incomes from high energy prices faded.
The OECD forecast that inflation in the Group of 20 major economies would fall from 8.1% last year to 5.9% this year and further decline to 4.5% in 2024 – still well above targets despite interest rate hikes by many central banks.
It said the full impact of higher interest rates was hard to gauge, warning that increased stress for borrowers could translate into losses for some banks, citing the recent collapse of Silicon Valley Bank in the United States as an example.
Setting aside turmoil in financial markets following SVB’s failure and continued worries about Swiss lender Credit Suisse, the European Central Bank hiked interest rates by a further half percentage point on Thursday to fight inflation.
The OECD projected that central bank policy rates would peak at 5.25-5.5% in the United States and 4.25% in the euro area and Britain with a decline in inflation possibly allowing for a “mild” easing next year.
The OECD forecast that U.S. economic growth would slow from 1.5% this year to 0.9% next year as higher interest rates cooled demand. With the U.S. labour market holding up better than expected, the forecast for this year was up from 0.5% in November and down from 1.0% for 2024.
Boosted by the easing of anti-COVID measures, the Chinese economy was seen growing 5.3% this year and 4.9% in 2024, up from November forecasts for 4.6% and 4.1% respectively.
The outlook for the euro area had also improved thanks to a drop in energy prices with the 20-nation bloc expected to see growth this year of 0.8% followed by 1.5% in 2024. The OECD had previously forecast 0.5% and 1.4% growth respectively.