The global economy is expected to stabilise after years of inflationary uncertainty and maintain growth of 3.2 percent over the next two years, according to a report released on Wednesday by the Organisation for Economic Cooperation and Development (OECD).
The report, subtitled “A Tipping Point”, cites falling inflation trends in most major economies, increasing trade, rising real incomes and gradual cuts in interest rates by central banks as key reasons for its optimism for the future.
But the report urges the government to remain vigilant against potential pitfalls and continue to implement reforms to promote economic growth.
“Governments also need to tackle structural reforms,” OECD Chief Economist Álvaro Santos Pereira said in a press release. “The pace of regulatory reforms has stagnated in recent years, stalling reform progress in key parts of the economy. In the face of sluggish productivity growth and tight fiscal space, product market reforms that promote open markets with healthy competitiveness remain a key lever to reinvigorate growth.”
Falling inflation
As we emerged from the COVID-19 lockdowns of the past few years, most countries around the world saw inflation rise sharply, with prices of everyday goods and services increasing by more than 10% per year in some cases.
But now the OECD sees signs of a return to normality.
As of the end of August, inflation in four of the five OECD countries was within one percentage point of their central banks’ target rates. Central banks typically aim for low but positive price growth in the economies they control. The US Federal Reserve, for example, aims to keep inflation at around 2% per year.
The OECD said it expects “headline” inflation for the G20 group of major developed countries to be around 3.3% in 2025.
Growth is a positive
The OECD expects all countries across the G20, except Argentina and Japan, to record positive economic growth in 2024. But the growth is not evenly distributed.
India is expected to lead the way with a growth rate of 6.7% in 2024, followed by Indonesia at 5.1% and China at 4.9%. Russia is expected to come in fourth this year with a growth rate of 3.7%, despite being under severe sanctions following its invasion of Ukraine.
Meanwhile, Germany is expected to barely stay in positive territory with an annual growth rate of 0.1%. Other countries are also reporting weak figures, with the UK, France, Canada, Australia, South Africa, Saudi Arabia and Italy all growing at or below 1.1%.
The OECD predicts a sharp reversal of fortunes for several countries in 2025, but none more so than Argentina, which has struggled this year to adapt to controversial economic reforms introduced by new President Javier Milley. But after a projected 4% decline in growth this year, Argentina is expected to bounce back sharply, registering a 3.9% growth rate in 2025.
Other economies on the rebound include Japan, which is expected to grow 1.4% in 2025 after a 0.1% decline this year, and Saudi Arabia, which is expected to accelerate to 3.7% growth in 2025 from a slow 1% growth rate this year.
Easing job market
In the aftermath of the pandemic, businesses in developed countries often struggled to find the workers they needed to return to full capacity, which could have resulted in higher wages and widespread inflation.
However, after peaking in most countries in late 2022 and early 2023, unfilled job vacancies are steadily declining in many G20 countries. This means some increase in unemployment, but it also reduces inflationary pressures.
The most significant declines were seen in the UK and US, where unfilled job vacancies fell by just over 30% in both countries.
Regulatory Reform
The report calls on governments around the world to implement “pro-competitive” regulatory reforms to “improve the foundations for future growth.”
Among the proposed measures are a gradual reduction in interest rates, which many G20 central banks have raised sharply to curb inflation, and fiscal responsibility measures to rein in unsustainable debt.
World Economic Forum
The World Economic Forum also released its Chief Economists’ Outlook on Wednesday, which surveyed chief economists from a wide range of public and private sector organisations. Like the OECD, they expressed optimism about the near future but also warned about potential problem areas.
“There are reasons for cautious optimism, including continued gradual easing of inflation and accommodative monetary policy,” the report said. “However, slower global growth for a long period and increasing political instability leave many countries vulnerable to economic shocks.”
The report also warned about the sustainability of public debt in many parts of the global economy, saying “current debt trends are undermining governments’ efforts to promote growth and leaving countries poorly prepared for the next economic downturn.”
