Europe slows as U.S. shines: world economic outlook improves but strong warnings persist

The global economy will shrink less than previously feared this year, with a robust United States offsetting eurozone weakness according to new predictions. However, there are strong warnings over the impact of regional conflicts and the desire to cut interest rates too soon, along with a call for greater international cooperation. 

In its interim report for February, the Organisation for Economic Co-operation and Development (OECD) says global growth will fall from 3.1 percent in 2023 to 2.9 percent this year. However, that's an improvement on the 2.7 percent it forecast in November. The Paris-based organization, which represents 38 countries, has held its outlook for 2025 at 3.0 percent. 

"Global growth proved resilient in 2023, with inflation declining more quickly than anticipated," the report states. "Outcomes diverged across countries, with strong growth in the United States and many emerging-market economies offset by a slowdown in most European countries."

The U.S. economy is now expected to grow 2.1 percent in 2024, a significant upgrade on the 1.5 percent predicted just a few months ago. Lower inflation has boosted wage growth for Americans while employment figures continue to exceed predictions. The latest data showed 353,000 new U.S. jobs were created in January, with unemployment close to a 50-year low. Rate cuts remain firmly on the horizon this year according to a still-cautious Federal Reserve chief Jerome Powell. All this offers a timely boost for President Joe Biden as he seeks re-election. 

Things aren't so rosy in Europe, where Germany's historic slowdown is weighing heavily, after the continent's largest economy shrank in 2023. The eurozone had been expected to pick up from 0.5 percent growth in 2023 to hit 0.9 percent this year. But that's now been rolled back to just 0.6 percent, slightly below the UK, which remains unchanged at 0.7 percent. Predictions for 2025 have also dropped. 

Meanwhile the forecast for China remains unchanged at 4.7 percent growth this year and 4.2 percent in 2025. 

While inflation has fallen faster than expected, the OECD says central banks should be wary of cutting interest rates too soon - or too late. 

The report stated: "Monetary policy needs to remain prudent to ensure that underlying inflationary pressures are durably contained. Scope exists to lower policy interest rates as inflation declines, but the policy stance should remain restrictive in most major economies for some time to come."

And in what could be seen as a shot across the bows against possible pre-emptive U.S. optimism, it said pay rises "generally remain above rates compatible with medium-term inflation objectives." 

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There are also stark warnings over the impact of the growing instability in the Middle East, including attacks on ships in the Red Sea which have disrupted global supply chains, and the continued fallout from the conflict in Ukraine. The OECD says there may well be renewed inflationary pressure in the coming months. 

The report stated: "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. Persisting service price pressures could also generate upside inflation surprises and trigger financial market repricing as expectations of monetary policy easing are reassessed. Growth could also be weaker than projected if the lingering effects from past policy rate increases are stronger than expected." 

The report does highlight ways in which governments can offset these dangers, calling for "enhanced international co-operation.... to revive global trade, ensure faster and better co-ordinated progress towards decarbonisation, and alleviate debt burdens in lower-income countries." 

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