Rapid economic rebound forecast – but supports ‘key’ to recovery

A rapid rebound in global growth is on track but it is too early for governments and central banks to withdraw exceptional support for their economies despite a spike in inflation, the Organisation for Economic Co-operation and Development (OECD) said on Tuesday in an update of its economic outlook.

After slumping 3.4 per cent last year during the worst of the Covid-19 crisis, the world economy is on course to grow 5.7 per cent this year, said the OECD, trimming its previous forecast by 0.1 percentage point.

The Paris-based policy forum said global growth would then ease to 4.5 per cent next year, up 0.1 percentage point from its previous forecast in late May.

The rapid recovery has brought global gross domestic product back to pre-Covid levels, though activity is still lagging in many developing countries where vaccination rates remain low, said the OECD.

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Inflation

Fuelled by recovering demand for goods and supply chain strains, inflation is expected to peak towards the end of the year at 4.5 per cent on average in the Group of 20 major economies, before easing to 3.5 per cent by the end of 2022.

Most central bankers and policymakers have concluded – for now – that the current spike is a fleeting reaction to the recovery rather than the prelude to a sustained period of higher inflation, though the debate is far from closed.

The OECD advised central banks to keep monetary policy loose, but at the same time offer clear guidance about how high they can tolerate the increase in inflation. It urged governments to remain flexible with their financial support for their economies and avoid withdrawing it as long as the short-term outlook remained hazy.

The US economy was seen expanding 6 per cent this year, down nearly a percentage point from May, and easing to 3.9 per cent in 2022, up 0.3 percentage points. Chinese growth was forecast at 8.5 per cent this year and 5.8 per cent in 2022, both unchanged from previous estimates. The OECD raised its forecast for euro-zone growth this year by a full percentage point to 5.3 per cent and nudged up its 2022 estimate by 0.2 percentage points to 4.6 per cent. – Reuters