World economy looks to dodge stagflation rut as outlook perks up

The world's economic outlook is perking up as growth proves more resilient and inflation is set to cool faster than previously expected in many countries, the OECD said.

While conflicts in the Middle East or more persistent price increases could still knock the economy from its more stable footing, the Paris-based organization said risks are becoming "better balanced."

The OECD raised the 2024 global growth forecast to 3.1% — from 2.9% in February — with notable improvements in its expectations for the US, China and India. The expansion should continue at 3.2% next year.

The brighter outlook indicates the world economy looks to avoid entering a stagflationary rut — a period of sluggish growth and rising unemployment mixed with elevated inflation — even if the pace of expansion won't return soon to the 3.4% average in the years before the pandemic and energy crisis.

Inflation will be softer than the OECD forecast three months ago, with the exception of the US, where it now expects prices to rise 2.5% this year instead of 2.2%. Still, it said US policy makers should be able to reduce interest rates in the second half of the year.

On Wednesday in Washington, Federal Reserve Chair Jerome Powell kept hopes alive for a rate cut in 2024 while acknowledging that a burst of inflation has reduced policymakers' confidence that price pressures are ebbing.

The OECD's assessment corroborates the slightly more positive views of other international institutions, including the International Monetary Fund which also lifted its forecasts last month.

"Cautious optimism has begun to take hold in the global economy, despite modest growth and the persistent shadow of geopolitical risks," OECD Chief Economist Clare Lombardelli said. "Inflation is easing faster than expected, labour markets remain strong with unemployment at or near record lows."

In the recovery, the OECD said divergence between strong growth in the US and a more sluggish Europe will persist in the near term, creating a "mixed macroeconomic landscape." That will translate into differing paces of interest rate cuts, with the European Central Bank set to begin easing before the Fed.

Still, the OECD said monetary authorities should be cautious because conflicts could push up energy prices and inflation, and the softening of cost pressures may also be slower than expected in services.

"Monetary policy needs to remain prudent to ensure that underlying inflationary pressures are durably contained," the OECD said.

For governments, it said the improving economic backdrop provides the opportunity to tackle bloated debt burdens that risk swelling further as higher borrowing costs feed through. It also cautioned countries will face growing spending demands from aging populations, climate change and needs to bolster defence.

"In the medium and longer term, the fiscal position is worrying," Lombardelli said. "A robust medium-term approach to containing spending, building revenues, and focusing policy efforts on growth-enhancing structural reforms are all needed."