The Organization for Economic Co-operation and Development (OECD) warns that countries might be embroiled in a prolonged battle against inflation, suggesting that persistent high interest rates could dampen economic growth in 2024.
On September 19, the OECD released its economic outlook report. Citing the resilience of the U.S. economy, the organization revised its 2023 global growth forecast upwards to 3.0% from 2.7%. However, it lowered the 2024 global growth prediction from 2.9% to 2.7%. Specifically:
- The U.S. growth forecast for 2023 was raised to 2.2% (previously 1.6%) and for 2024 to 1.3% (previously 1.0%).
- The Eurozone's 2023 growth prediction was reduced to 0.6% (from 0.9%) and for 2024 to 1.1% (from 1.5%).
- Japan's 2023 growth estimate was increased to 1.8% (from 1.3%), but the 2024 forecast was trimmed to 1.0% (from 1.1%).
- Germany's GDP for 2023 was revised to a contraction of 0.2% (previously zero growth), and the 2024 GDP growth was lowered to 0.9% (from 1.3%).
The OECD noted that while many countries experienced a decline in overall inflation in the first half of 2023 due to falling food and energy prices, core inflation, excluding energy and food, remained significantly above central bank targets. Central banks should maintain or even increase interest rates to curb inflation, as most developed economies have limited room to reduce policy rates before 2024.
Although rate hikes haven't significantly curbed inflation, the OECD emphasized that monetary policy is beginning to impact economies. As policy rates rise rapidly, interest rates on new business loans and mortgages are also increasing. While higher borrowing costs are painful for households and businesses, this is a standard channel through which monetary policy typically operates.
OECD Chief Economist Clare Lombardelli stated that even in the U.S., inflationary pressures persist, suggesting it's "too early to declare victory." The current scenario depicts sluggish global economic growth, which won't recover without policy reforms.
Lombardelli believes that compared to the U.S., soaring oil prices pose a greater inflationary risk to Europe. The past impacts of rising energy prices have varied between these two regions, as Europe heavily imports energy, while U.S. demand remains largely unaffected. This difference explains the OECD's upward revision for U.S. growth and the downward adjustment for the Eurozone.
Currently, Brent crude oil prices have surged over 30% since their March low, reaching $94.46 per barrel. Production cuts by Saudi Arabia and Russia have tightened supply, while demand has soared to record levels, causing refineries to rapidly deplete inventories and scramble for crude oil. The return to triple-digit oil prices seems to be a matter of "when" rather than "if."
This week, led by the Federal Reserve, the "Super Central Bank Week" is set to make significant announcements. Investors await interest rate decisions from the Federal Reserve, Bank of England, Swiss National Bank, and Bank of Japan.
Market indicators suggest a near-certain pause in the Fed's rate hikes in September, with a 99% probability. The chances of holding steady in November and December are 98%, 70%, and 62%, respectively, indicating most market participants believe the rate hikes have reached their end.
Given the recent data on CPI, PPI, and retail sales, U.S. inflation might oscillate at relatively high levels following the surge in oil prices. Economists believe the Fed might be caught in a challenging, prolonged battle against inflation and might need to continue raising rates after September. Even if rate hikes cease by year-end, the Fed will likely maintain high interest rates for some time, and the balance sheet reduction process will continue, indicating that tightening policies are far from over.