| 10 December 2023, Sunday |

Rate hikes set to slow down world economy: OECD report

A report by Bloomberg suggests that as interest rates increase and China’s economic recovery falls short of expectations, the global economy is anticipated to decelerate.
The most recent OECD (The Organisation for Economic Cooperation and Development) predictions indicate that growth, which was already “sub-par” this year at 3 per cent, will slow to 2.7 per cent in 2024. That would represent the weakest yearly expansion since the global financial crisis, with the exception of 2020, when Covid struck.

Bloomberg quoted the OECD Chief Economist Clare Lombardelli as saying during a news conference on Tuesday that “high inflation continues to unwind, but the world economy remains in a difficult place.” “Inflation and slow growth present us with a double challenge,” she added.
The Paris-based group issued a warning that risks to its estimate are biassed to the downside because prior rate hikes may have had a bigger impact than anticipated and because inflation may turn out to be persistent, necessitating additional monetary tightening. China’s problems were referred to as a “key risk” for global output.

Global GDP is anticipated to decline after a stronger-than-expected start to 2023, aided by reduced energy prices and China’s reopening, according to the OECD. The effects of tighter monetary policy are becoming more apparent, consumer and corporate confidence are declining, and China’s recovery is losing steam.

The bleak picture will put central bankers to the test as the economy continues to be impacted by their efforts to combat inflation, and politicians worry that activity is being stifled.

Despite indicating that the peak may have been reached, the European Central Bank announced its tenth consecutive hike last week. On Wednesday, the Federal Reserve is anticipated to do nothing.

The OECD warned against slowing down as core price increases remained persistent in several countries despite declining headline indicators. Rate reductions are unlikely to happen until “well into 2024,” according to the report.

“Monetary policy needs to remain restrictive until there are clear signs that underlying inflation pressures have durably abated,” Bloomberg quoted the OECD as saying.

Based on their exposure and whether they are importers or exporters of the fossil fuel, Lombardelli said that certain countries have experienced a slight increase in inflation as a result of the 25 per cent increase in oil prices since May.

According to her, countries would certainly not be pleased about this. “Oil prices will continue to be potentially volatile through this period. That’s why we’ve highlighted it as one of the risks. The impact obviously will be, as we have learned, a squeezing on household budgets and on demand.”

Germany will experience a 0.2 per cent decline in 2023, making it the only G-20 country other than Argentina to experience a downturn, according to the OECD’s analysis of regional and national outlooks. The OECD also lowered its growth projections for the euro-area for this year and next. Even if the US economy would grow more quickly than expected in June, it will drop to 1.3 per cent in 2024 from 2.2 per cent in 2023.

The sharpest growth downgrades were seen in China, where output is projected to increase by less than 5 per cent next year due to weak domestic demand and structural difficulties in the real estate markets. According to the OECD, China’s options for providing effective policy support may be more constrained than in the past.

The group cautioned against governments using additional spending to boost growth. Instead, it recommended reducing support to make way for upcoming investment difficulties and prevent fuelling the inflation that central banks are trying to control.

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