OECD Outlook: Slower GDP Growth and Uneven Recovery

The Organisation for Economic Co-operation and Development (OECD) has projected a soft landing for advanced economies, as tighter financial conditions, weak trade growth, and lower business and consumer confidence continue to take a toll on global economies. While GDP growth in 2023 was stronger than expected, it is expected to slow down in the coming years.

The Global Economic Outlook

The OECD predicts that global growth will ease to 2.7% in 2024, down from 2.9% this year, before picking up to 3% in 2025. This projection is based on expectations of a recovery in real income growth and lower interest rates. However, the OECD had previously forecasted a slowdown in growth due to weak business sentiment, slowing credit growth, and low consumer confidence in many major economies.

Inequality in Growth

The pace of growth is uneven, with advanced economies experiencing slower growth compared to emerging markets. Europe, in particular, lags behind North America and major Asian economies. The region faces challenges such as high-interest rates and increased energy costs, which hinder economic recovery.

European Outlook

According to the OECD, the eurozone is expected to see 0.5% annual GDP growth in the final quarter of 2023, followed by 0.6% in 2024 and 1.5% in 2025. However, growth in Europe is being dragged down by high bank finance reliance and the pressure on incomes caused by higher energy costs. Despite these challenges, consumption is expected to remain strong due to tight labor markets and increasing real incomes.

Inflation Concerns

Headline inflation has fallen worldwide over the past year, primarily due to moderate energy prices. However, recent increases in oil prices and rising geopolitical tensions have clouded inflation prospects. The OECD projects that inflation in the Eurozone will slow to 2.9% next year, following a 5.5% increase this year. However, the European Central Bank’s target of 2% is not expected to be reached until the final months of 2025.

Low Unemployment Rates

Unemployment rates across OECD countries remain low, with an expected rate of 5.1% for both 2024 and 2025. While some countries, such as the United States and the United Kingdom, may see an increase in unemployment, Japan and the eurozone are expected to maintain low unemployment levels. Labor force growth remains strong globally, but there has been a slowdown in annual employment growth and an increase in unemployment rates in some cases.

Economic Consequences of Middle East Conflict

A broadened conflict in the Middle East could have significant economic consequences, particularly for European economies. Elevated energy and food prices resulting from the conflict could disrupt energy markets and major trade routes, leading to slower growth and increased inflation. This could prompt central banks to keep policy rates higher for longer, slowing spending and causing rising unemployment and bankruptcies.

The Need to Revive Global Trade

The OECD highlights the weak state of global trade, which has been impacted by trade restrictions, protectionist policies, and the restructuring of global value chains. Reviving global trade requires multilateral cooperation. The uncertain outlook for trade poses a significant concern, given its importance for productivity and development.

Supporting Long-Term Growth

To support long-term growth, the OECD suggests maintaining current tight monetary policies until there are clear signs that inflation is under control. It cautions against rate reductions until well into 2024. Prudent fiscal policies are also recommended, as governments face rising costs of refinancing debts and increased spending on aging populations, climate transitions, and defense. Additionally, clear spending and tax plans, as well as investment in decarbonization, are deemed essential for avoiding future shocks and ensuring a strong economic outlook.