OECD raises Brazil’s economic growth forecast – 06/07/2023 – Market

Global economic growth will pick up only moderately next year as the full effects of interest rate hikes are felt, the Organization for Economic Co-operation and Development (OECD) said on Wednesday, the latest institution to warn of the impact of monetary tightening.

The world economy is expected to grow by 2.7% this year, the OECD said, up from its previous forecast of 2.6% in March.

Although driven by the end of China’s Covid-zero policy, that would be the lowest annual rate since the 2008-2009 global financial crisis, barring 2020, the year marked by the pandemic, the Paris-based organization said.

Growth will then accelerate only slightly next year to 2.9% — unchanged from the March forecast — as interest rate hikes by the world’s main central banks last year increasingly weigh on private investment, starting with markets. real estate.

On Tuesday (6), the World Bank also cited the growing impact of interest rate increases by raising its world growth forecast this year to 2.1%, but reducing the account for 2024 to 2.4%, compared to a forecast previous 2.7%.

The OECD estimates that the US economy will grow by 1.6% this year before slowing to 1% in 2024, with the lagged effect of interest rate hikes hitting the world’s largest economy particularly hard. Previously, the expectation was for an expansion of 1.5% this year and 0.9% in 2024.

Driven by the end of Covid restrictions, the Chinese economy is expected to grow by 5.4% in 2023 before moderating to 5.1% in 2024. Previous projections were at 5.3% and 4.9%, respectively.

As Europe’s winter energy price shock wears off, euro zone growth is expected to accelerate from 0.9% this year to 1.5% in 2024, as lower inflation weighs less on incomes. In March, the OECD estimated growth of 0.8% in 2023 and 1.4% in 2024.

For Brazil, the OECD has improved economic expansion projections to 1.7% in 2023 and 1.2% in 2024, against expectations in March of 1.0% and 1.1%, respectively.

The OECD predicts that inflation in the Group of 20 major economies will fall from 7.8% last year to 6.1% this year and 4.7% in 2024 — still well above the targets of many central banks, despite increases in interest rates.

“A substantial risk is that inflation will prove more persistent and, in response, interest rates will need to stay higher for longer,” OECD Chief Economist Clare Lombardelli told a news conference.

OECD head Mathias Cormann agreed, saying the risk of major central banks doing too little or too much is currently “equally balanced”.

Federal Reserve officials have signaled a possible pause in US interest rate hikes, while the European Central Bank has indicated further hikes are likely in the coming months.

In the OECD outlook, the Fed’s benchmark interest rate is expected to peak at 5.25-5.5%, with “modest” cuts in the second half of 2024.

In the euro zone, the OECD expects the ECB to continue raising rates in the face of still high core inflation, with a peak observed in the third quarter. The organization predicts that the ECB will leave its base rate at 4.25% by the end of 2024.

“Long way”

Despite the positive signs, the economy “has a long way to go before achieving strong and sustainable growth”, highlighted the British Clare Lombardelli, who succeeded the French Laurence Boone.

“The recovery will be more fragile compared to past parameters,” he added.

Among the challenges, she mentioned the persistence of “obstinately high” inflation, which obliges central banks “to continue with restrictive monetary policies until there are clear signs” of improvement.

“The period we are going through is characterized by slow growth, but this is what political leaders wanted, as their ambition was to dissipate inflationary pressures,” James Pomeroy, an economist at HSBC, told AFP.

“We still haven’t seen everywhere the effects of high interest rates on the economy”, which may fail to be noticed in the euro zone and in the United States in the coming months, affecting growth even more, he added.

Increases in interest rates also have a major impact on the public finances of states, raising the cost of credit.

“Almost all countries have deficits and debts greater than before the pandemic, and many face increasing pressure on public spending caused by an aging population, the climate transition and the burden of debt costs”, says the report, which recommends to governments a better targeting of budget support.