Battling inflation ‘priority’ as global growth slows: OECD

Published : 24 Nov 2022 07:40 PM

World economic growth is slowing due to decades-high inflation, the OECD said Tuesday, calling for "essential" further monetary policy tightening and "more targeted" government support.

 Global GDP is set to grow 3.1 percent this year -- nearly half the rate for last year, the Organization for Economic Co-operation and Development said.

 The slide is due to continue next year, with global growth falling to 2.2 percent before rebounding "to a relatively modest 2.7 percent in 2024", the Paris-based organisation said.

 Amid the effects of Russia's war in Ukraine, "growth has lost momentum, high inflation is proving persistent, confidence has weakened, and uncertainty is high", it said in its latest forecasts.

 "An end to the war and a just peace for Ukraine would be the most impactful way to improve the global economic outlook," OECD secretary general Mathias Cormann said during a press conference.

 OECD chief economist Alvaro Santos Pereira said in the report that the global economy was "reeling from the largest energy crisis since the 1970s".

 The energy shock has pushed inflation up "to levels not seen for many decades" and is hitting economic growth around the world, he added.

 Inflation had already been on the rise before the conflict due to bottlenecks in the global supply chain after countries emerged from Covid lockdowns. But the OECD said that inflation was set to reach eight percent in the fourth quarter of this year in the Group of 20 top economies, falling to 5.5 percent in 2023 and 2024.

 Cormann said that inflationary pressure was decreasing, but urged central banks to press on with interest rates hikes.

 - 'Top policy priority' -

 "We do expect inflation to gradually moderate as tighter monetary policy takes effect, demand and energy price pressures diminish over time and transport costs and delivery times continue to normalise," he told reporters.

 However, he stressed there remained the possibility that "economic activity may become even weaker if energy prices rise further or if energy disruptions affect gas and electricity markets in Europe and Asia".

 Fighting inflation is a "top policy priority", the OECD said, as soaring prices erode people's purchasing power worldwide.

"Our central scenario is not a global recession but a significant growth slowdown for the world economy in 2023, as well as still high, albeit declining, inflation in many countries," Santos Pereira said.The OECD recommended tightening monetary policy in countries where price rises remained high.

It also advocated targeted support for families and firms to avoid exacerbating inflationary pressures, with energy costs "likely to remain high and volatile for some time".

   "In these difficult and uncertain times, policy has once again a crucial role to play: further tightening of monetary policy is essential to fight inflation, and fiscal policy support should become more targeted and temporary," the OECD said.

Cormann acknowledged that government support had helped cushion the impact of high energy costs for households and businesses.

But he said support needed to be "temporary and better targeted".

"This would allow to minimise fiscal costs, focus on the most vulnerable and preserve the incentives to reduce energy consumption and boost investment in additional supplies," he said.

The OECD called for such aid to be better targeted notably in France and Germany.

Europe's biggest economy is expected to grow by just 1.8 percent this year, while for France, the OECD forecasts growth of 2.6 percent.

And in Britain, after the economic havoc under short-lived ex-prime minister Liz Truss, the OECD called on her successor Rishi Sunak's government to ensure future budgetary targets were well defined and transparent to reduce concern about debt sustainability.

The 38-member group called for an acceleration in investment in adopting and developing clean energy sources and technology to help diversify supply.

 Gas and oil deliveries from major producer Russia have been severely disrupted following its invasion of Ukraine. Western allies sanctioned its energy exports and Russia slashed supplies in the stand-off over the conflict.

 Stocks rise, dollar slips as Fed signals softer rate hike pace

Asian markets rallied Thursday and the dollar weakened further after minutes from the Federal Reserve's latest policy meeting suggested it could slow its pace of rate hikes.

The news provided traders with a cushion against concerns about surging Covid cases in China that have fanned speculation authorities will revert to lockdowns and other economically debilitating measures to fight the outbreak.

Wednesday's much-anticipated minutes showed most US central bank chiefs felt smaller increases would "likely soon be appropriate" as the economy shows signs of weakness following almost a year of monetary tightening.

Bets were growing on officials announcing a 50-basis-point lift at their December gathering, down from four straight 75-point hikes, with officials keeping tabs on economic data.

The latest indicators showed the manufacturing and services sectors continued to contract last month, while jobless claims picked up.

The developments allowed Wall Street traders to head off to their Thanksgiving break with a spring in their step, the S&P 500 ending at a two-month high as they finally see a glimmer of light at the end of the tunnel after a painful year.

And Asia followed suit, with Tokyo, Hong Kong, Shanghai, Sydney, Seoul, Singapore, Taipei, Manila and Jakarta all in the red.

The more risk-on environment was also reflected in a further drop in the dollar against its peers, having surged for much of the year as traders bet on ever-higher US interest rates.

"Equities are revelling in the wake of the... minutes after the Fed telegraphed a downshift from jumbo to extra-large rate hikes," said SPI Asset Management's Stephen Innes.

"A commitment to moving toward restrictive monetary policy remains intact, but the (policy board) is ready to slow the path toward that destination."

He added that a less aggressive Fed "should pave the runway for take-off in Asia, fuelled by expectations of China's reopening by March next year".

Investors are keeping a close watch on China after it announced a record number of new Covid cases on Thursday as authorities worked to curb the spread with snap lockdowns, mass testing and travel restrictions.

While officials are trying more targeted measures to contain the disease, there remains a concern that they will resort to the painful city-wide shutdowns seen in Shanghai earlier this year as part of the country's zero-Covid strategy, which hammered the economy.

However, the concern has been tempered somewhat after China signalled fresh support measures aimed at boosting growth, with the State Council saying tools would be used to ensure liquidity in markets.

The comments led to talk of another cut in the amount of cash banks must keep in reserve, freeing them to lend more.

- Key figures around 0230 GMT -

Tokyo - Nikkei 225: UP 1.2 percent at 28,448.58 (break)

Hong Kong - Hang Seng Index: UP 0.5 percent at 17,617.28

Shanghai - Composite: UP 0.3 percent at 3,106.13

Euro/dollar: UP at $1.0424 from $1.0401 on Wednesday

Dollar/yen: DOWN at 138.82 yen from 139.52 yen

Pound/dollar: UP at $1.2088 from $1.2064

Euro/pound: UP at 86.23 pence from 86.18 pence

West Texas Intermediate: DOWN 0.2 percent at $77.77 per barrel

Brent North Sea crude: DOWN 0.3 percent at $85.14 per barrel

New York - Dow: UP 0.3 percent at 34,194.06 (close)

London - FTSE 100: UP 0.2 percent at 7,465.24 (close)

The upheaval has sent energy costs spiralling and fuelled decades-high inflation in major economies, leading central banks to hike interest rates in a bid to tame runaway prices.