Inflation, debt and uncertainty cloud global economic outlook: OECD

PARIS: The global economy will slow slightly next year but the risk of a hard landing has subsided despite high levels of debt and uncertainty over interest rates, the Organisation for Economic Cooperation and Development said on Wednesday.

Global growth is set to moderate from 2.9 percent this year to 2.7 percent in 2024 before picking up in 2025 to 3.0 percent, the Paris-based policy forum said in its latest Economic Outlook.

Growth in advanced economies that make up the OECD's 38 members was seen headed for a soft landing, with the United States holding up better than expected so far. "Our central projections are for a soft landing, but that cannot be taken for granted," OECD chief economist Clare Lombardelli told a news conference.

"Monetary policy needs careful calibration to bring inflation to targets while minimising the impact on growth. These judgements are now harder than earlier in the cycle and the risks of policy errors are greater," she added.

The OECD forecast U.S. growth would slow from 2.4 percent this year to 1.5 percent next year, revising up its estimates from September when it predicted U.S. growth of 2.2 percent in 2023 and 1.3 percent in 2024.

Though the risk of a hard landing in the United States and elsewhere had eased, the OECD said that the risk of recession was not off the table given weak housing markets, high oil prices and sluggish lending.

China's economy was also expected to slow as it grapples with a deflating real estate bubble and consumers save more in the face of greater uncertainty about the outlook.

Its growth was seen easing from 5.2 percent this year to 4.7 percent in 2024 - both marginally higher than expected in September - before slowing further in 2025 to 4.2 percent, the OECD forecast.

In the euro area, growth was seen picking up from 0.6 percent this year to 0.9 percent in 2024 and 1.1 percent in 2025 as Germany - the region's largest economy - emerged from a recession this year.

Nonetheless, the OECD warned that, because of the high level of bank financing in the euro zone, the full impact of interest rate hikes remained uncertain and could weigh more on growth than expected.

Meanwhile, Japan, the only major advanced economy yet to hike interest rates in the current cycle, was expected to see growth slow from 1.7 percent this year to 1.0 percent in 2024 before picking up to 1.2 percent in 2024.

While countries' growth outlooks were diverging, they shared similar fiscal pressures, with debt burdens projected tokeep rising for years to come in G7 countries, the OECD warned.

"Governments need to act to prevent unsustainable debt paths. Needed reforms include medium-term plans to curb deficits over time, reducing the cost of ageing and to preserve spending that is effective and efficient," Lombardelli said.

The OECD also warned that inflation could force central banks in western Europe to keep interest rates higher next year than financial markets expect, despite some of the weakest global growth rates since the financial crisis.

It expected the European Central Bank and the Bank of England to hold benchmark rates at their current peaks until 2025 — much longer than the markets are expecting — because of persistent inflationary pressures.

That contrasts with the US Federal Reserve, which it expects to start cutting rates in the second half of next year.

Clare Lombardelli, OECD chief economist, said that while the organisation expected a “soft landing”, it was too soon to cut borrowing costs.

“Monetary policy is going to have to remain restrictive for a period of time — we are still worried about inflation persistence,” she told the Financial Times. “You are going to need real rates to be high.”

The OECD forecast that average inflation in the G20 economies will ease only gradually, falling to 5.8 per cent in 2024 and 3.8 per cent in 2025, compared with 6.2 per cent in 2023.

Senior policymakers in the US and Europe have argued that talk of rate cuts is premature, but markets have been hard to convince, as growth slows and headline inflation rates retreat. Investors are now pricing in Fed rate cuts as soon as May 2024 and reductions in eurozone borrowing costs in April.

Investors increased their bets on near-term rate cuts in the US this week, after Christopher Waller, one of the Fed’s most hawkish policymakers, signalled that borrowing costs were unlikely to rise further and could be cut if inflation continued to slow.

But the OECD warned the “full effects” of the tightening over the past two years had yet to be felt. It added that cuts could only come after clear signs that underlying price pressures were being “durably lowered” and as short-term inflation expectations fell.

The organisation said that while there had been falls in core inflation, which excludes food and energy, more than half of the items in inflation baskets in the US, the euro area and the UK still showed annual rates above 4 per cent.

Lombardelli said the US would be able to lower interest rates before the ECB because the Fed had started raising rates sooner and more aggressively.

Christine Lagarde, ECB president, warned this week that eurozone inflation was likely to rise again in the coming months and that now was “not the time to start declaring victory”.

The OECD also warned that many rich countries faced “sizeable risks” to their long-run fiscal sustainability without more significant efforts to rein in public borrowing.

Many of them were set to record primary budget deficits this year and next, indicating it would be harder to lower debt ratios, the OECD added.