The global economy is set for a weak recovery from the shocks of Covid and Russia’s war in Ukraine, dogged by persistent inflation and the restrictive policies of major central banks seeking to contain price pressures, the OECD said.

The Paris-based organisation’s latest Economic Outlook forecasts a 2.7% expansion of world output this year and only a modest pickup to 2.9% in 2024, both below the 3.4% average in the seven years before the pandemic. The US, the euro area and China will see the same relative sluggishness in their recoveries, while inflation will be stronger than in the period through 2019. 

The situation creates a particular headache for central banks as they must continue to react to core price pressures that are proving stronger than expected, while not overly hurting growth, the OECD said.

“The global economy is turning a corner but faces a long road ahead to attain strong and sustainable growth,” said Clare Lombardelli, the organisation’s chief economist. “Policymakers need to unwind the impact of a sequence of negative shocks to the global economy and face a complex set of challenges in doing so.”

The caution comes a day after the World Bank warned the global economy is in a precarious state and heading for a substantial growth slowdown later this year as interest-rate increases start to bite.

Major monetary authorities face imminent decisions on whether to pause or pursue the fastest cycle of rate hikes since the 1980s, with both the Federal Reserve and the European Central Bank scheduled to meet next week. 

The OECD said past hikes are increasingly feeding through - particularly in property and financial markets - but that their full effect will only appear later this year and in 2024. Clouding the picture even further, it said there is uncertainty about the strength of that impact, while inflation could yet continue to be more persistent than expected.

“Significant uncertainty about economic prospects remains, and the major risks to the projections are on the downside,” the OECD said.

Still, it urged central banks to remain restrictive and even raise rates further if needed until there are clear signs that underlying inflationary pressure is durably reduced. The OECD said authorities should make full use of liquidity instruments if tighter policies create market stress and that emerging-market governments could temporarily conduct foreign exchange interventions or capital controls to avoid severe risks to stability.

To help central banks limit how much demand pressures stoke inflation, governments should make fiscal support for households more targeted to only the most vulnerable, the OECD said. Its data show aid to mitigate energy costs is still sizable in Europe and mainly untargeted, which also puts pressure on public finances already bearing larger debt burdens after the Covid pandemic.

“The choices for fiscal policymakers are clearer but no easier to implement given the inherent political sensitivity of policy choices with direct redistributive effects,” Lombardelli said.

  - Bloomberg