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OECD hikes global growth outlook but warns of Middle East risk

The global economy is expected to perform better this year than predicted only a few months ago, driven by an improved outlook in the United States that is expected to offset eurozone weakness, the Organisation for Economic Co-operation and Development (OECD) said Monday.

But the Paris-based OECD warned that the Middle East conflict posed a risk, with disruptions in Red Sea shipping threatening to increase consumer prices.

World economic growth is expected to expand by 2.9% this year, better than the 2.7% expected in November in the OECD’s last outlook.

In an update of its forecasts for major economies, the organization left its 2025 global estimate unchanged at 3%, when growth is expected to be boosted by major central banks’ rate cuts as inflation pressures subside.

Global growth “proved unexpectedly resilient” in 2023, reaching 3.1% as inflation declined faster than anticipated, with strong growth in the U.S. and emerging markets offsetting slowdowns in European nations.

But indicators suggest “some moderation” of growth, with higher interest rates affecting the credit and housing markets while global trade remains subdued, according to the OECD.

While inflation is falling in major economies, “it is too soon to be sure that underlying price pressures are fully contained,” the OECD added in an update to its annual economic outlook.

Threats from Gaza conflict, Red Sea attacks

The OECD highlighted the threats from the conflict between Israel and Hamas in Gaza and the attacks on ships in the Red Sea by Yemeni rebels who say they were targeting Israel-linked ships in solidarity with the Palestinians.

U.S. and U.K. forces have responded with strikes against the Houthi rebels, who have since declared American and British interests to be legitimate targets as well.

“High geopolitical tensions are a significant near-term risk to activity and inflation, particularly if the conflict in the Middle East were to disrupt energy markets,” the report said.

“A widening or escalation of the conflict could disrupt shipping more extensively than presently expected, intensify supply bottlenecks, and push up energy prices if traffic is interrupted in the key routes for the transport of oil and gas from the Middle East to Asia, Europe and the Americas.”

Around 15% of global maritime trade volume passed through the Red Sea in 2022, according to the OECD.

The attacks have sharply raised shipping costs and lengthened delivery times of goods as companies have rerouted their vessels around the southern tip of Africa, increasing their journey by as much as 50%, it said.

Production schedules have been disrupted in Europe, notably for automakers, the report said.

The recent 100% increase in shipping costs, if persistent, could add 0.4 percentage points to consumer price inflation after about a year, the OECD warned.

‘Lingering effects’ of rate hikes

The organization said monetary policy needs to “remain prudent” to ensure that inflationary pressure is “durably contained.”

The U.S. Federal Reserve (Fed), the European Central Bank (ECB) and the Bank of England (BoE) raised interest rates sharply in efforts to rein in consumer prices that rose after the COVID-19 pandemic and jumped further after Russia’s invasion of Ukraine.

“Growth could also be weaker than projected if the lingering effects from past policy rate increases are stronger than expected,” the OECD said.

The three central banks have recently paused their rate-hike campaigns and have kept them at high levels.

But markets are hopeful that policymakers will soon begin to cut rates as inflation has slowed in major economies, though it remains above 2% targets. The Fed is expected to move in the second quarter and the ECB to follow in the third quarter.

Inflation this year is expected to slow to 2.3% in the United States, 2.6% in the eurozone and 3.6% in Britain, the OECD projected.

The U.S. economy is expected to grow 2.1% in 2024 and 1.7% in 2025 as lower inflation boosted wage growth and triggered interest rate cuts, the OECD said, raising its 2024 forecast from 1.5% previously and leaving 2025 unchanged.

With a slowdown in Germany weighing on the broader euro area, the shared currency bloc’s outlook had worsened since November, with its economy now expected to pick up from 0.5% last year to only 0.6% this year, down from 0.9% previously. In 2025, it was seen growing 1.3%, revised down from 1.5%.

As China, the world’s second-biggest economy, contends with the real estate market wobbles and weak consumer confidence, its growth is seen slowing from 5.2% in 2023 to 4.7% in 2024 and to 4.2% in 2025, all unchanged from November forecasts.

Türkiye is seen expanding by 2.9% this year, unchanged from the forecast in OECD’s last report in November. But the organization lowered its 2025 estimate to 3.1%, down from 3.2%.

Argentina inflation to soar to 250%

Meanwhile, the OECD said Argentina’s inflation rate is expected to skyrocket to 250.6% this year and its economy to shrink more than previously forecast.

The sharp downgrade comes as new libertarian President Javier Milei launches sweeping reforms that have triggered protests in Latin America’s third-biggest economy.

“High inflation and sizeable fiscal tightening are projected to result in an output decline in Argentina in 2024 before growth recovers in 2025 as reforms start to take effect,” the OECD said.

The organization had forecast an average annual inflation of 157.1% in November.

However, the OECD said consumer price increases in Argentina “accelerated in late 2023, implying a strong carryover effect for average annual inflation in 2024.”

Argentina’s economy is now expected to contract by 2.3% this year, compared to a previous estimate of 1.3%.

Milei, a self-styled “anarcho-capitalist,” won a resounding election victory in October, riding a wave of anger over decades of economic crisis in the South American nation.

Milei began his term by devaluing the peso by more than 50%, cutting state subsidies for fuel and transport, reducing the number of ministries by half, and scrapping hundreds of rules to deregulate the economy.

His reform package touches on many areas of public and private life, from privatizations to cultural issues, the penal code, divorce and the status of football clubs.

The bill won the “general” approval in principle of the lower house of Congress on Friday.

Last week, IMF chief Kristalina Georgieva praised the Milei government’s “bold actions to restore macroeconomic stability and … address long-standing impediments to growth.”

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