The OECD forecasts that persistent inflation and increasing interest rates will harm the world economy

This year and next, the global economy must navigate a shaky recovery as rising inflation drags down consumer spending and increasing interest rates weigh on markets, GDP, and banks.

That was the main finding of the Organisation for Economic Cooperation and Development’s most recent economic forecast, released on Wednesday. The organisation, which consists of 38 member nations, increased its growth prediction for this year from an expected 2.2% in November to 2.7%, although it predicted just a little uptick to 2.9% for the next year.

With annual growth of 3.4% observed in the pre-pandemic years 2013-2019, the recovery from the COVID-19 pandemic and energy price surge linked to Russia’s invasion of Ukraine is anticipated to be subpar by historical standards.

The road ahead is paved with dangers, such as an intensification of Russia’s conflict in Ukraine, which saw a dam fall on Tuesday that both sides blamed on the other, debt crises in emerging nations, and sudden increases in interest rates that might have unintended consequences for banks and investors.

The international agency said, “The global economy is turning a corner but faces a long road ahead to attain strong and sustainable growth.” “Global economic developments have improved, but the recovery is still shaky.”

It was a more upbeat forecast than the one offered by the World Bank on Tuesday, which cited comparable risks in its prediction of 2.1% global growth this year. That was still an improvement above its 1.7% January prediction.

The worst of the latest inflation epidemic has been mitigated by the drop in energy costs to pre-invasion levels. However, these expenses remain greater than they were before to the beginning of Russia’s force buildup on the Ukrainian border in early 2021.

The reopening of China after severe epidemic precautions has increased activity worldwide.

Core inflation, which includes volatile energy and food costs, is proving to be more persistent, however, as some businesses hike prices to boost profits and employees demand higher compensation in the context of low unemployment.

In the Group of 20 nations, which account for more than 80% of the global economy, the OECD forecasts that inflation will fall to 5.2% by year’s end from 7.8% at the end of last year.

By the fourth quarter of this year, annual inflation in the US should be 3.2%, while it should decrease to 3.5% in Europe.

While such levels would provide some respite, they are still over the 2% inflation benchmarks set by the US Federal Reserve and European Central Bank, which have been swiftly hiking interest rates to combat inflation. This raises the cost of borrowing money to finance home purchases and company growth.

The OECD issued a warning, stating that although central banks “must keep a watchful eye, given the uncertainties around the exact impact” of the quick rises, they “must maintain policies that restrict credit.”

According to the group, “signs of stress have begun to emerge” as a result of slowing real estate markets and growing anxiety about the effects of more costly financing.

Countries that spent money on pandemic relief for individuals, families, and enterprises already struggle with increased public debt, and now they must also bear higher expenses for paying it off.

Only moderate growth is anticipated for both the US and Europe.

Higher borrowing costs in rate-sensitive industries like manufacturing and home development are a concern for the US. The unemployment rate is predicted to steadily increase from 3.7 percent in May to 4.5 percent in 2024 as demand decreases. Inflation is anticipated to decline due to an increase in employment and a decrease in wage increases.

However, the OECD warned that “the economic outlook could worsen if rising interest rates expose additional financial fragilities.”

The bankruptcy of Silicon Valley Bank and two other US lenders brought to light potential issues with the banking system should financial institutions lose money on bonds and other assets whose value declines when interest rates rise.

Asia’s economy, particularly those of China, India, Indonesia, and Singapore, will account for the majority of global growth. China’s growth is anticipated to hit 5.4% this year and 5.1% next year as infrastructure investment fuels a building boom and businesses like tourism and entertainment emerge from COVID-19 lockdowns. Weak global demand should be used as a brake on exports.