Inflation will continue to be one of the main challenges over the next two years. According to the OECD’s Spring Economic Report, the CPI in developed countries will remain above 3% in both 2024 and 2025. Specifically, it projects that inflation in the organization’s member countries will close this year at 5.03% and will modestly decrease in the following year, specifically to 3.43%.
In the case of the G-20, inflation will end this year at 5.9% and is expected to be 3.5% in 2025, also far from the 3% target. Considering these data, the organization led by Mathias Cormann recommends waiting until the second half of the year to begin cutting interest rates in the main economies. “A continued projected decrease in overall and core inflation should allow central banks to start cutting official interest rates this year in many economies, although real rates will remain restrictive (above estimated neutral levels) for some time.”
But this clashes unilaterally with what the Federal Reserve of the United States projected on Monday, after deciding to keep interest rates between 5.25% and 5.50%. The organization, led by Jerome Powell, stated in a statement that “in recent months, there has been a lack of further progress towards the 2% inflation target”, confirming fears of price resistance.
This argument clashes directly with the OECD, which predicts that U.S. inflation will continue to decrease to 2.45% in 2024 and 2.05% in 2025. However, the reality is that the international organization does not have information as updated as the Fed, whose experts monitor the U.S. economy practically every week and in real time.
Regarding growth forecasts, the OECD points out that the GDP of the United States will grow by 2.6% in 2024 and 1.8% in 2025. In this sense, analysts at the organization highlight that growth prospects could surprise on the downside if core inflation remains high, “which would delay any possible easing of monetary policy”. They also warn of the high level of deficit the country will have in the coming years, necessitating a deep tax reform. “There is room,” they point out.
In the case of the Eurozone, the OECD’s forecasts point to a drop in inflation from 5.4% in 2023 to 2.34% in 2024, and it will close 2025 with a CPI of 2.16%.
In this sense, they highlight that core inflation “remains unstable” and service prices increase by 4% on an annual basis, adding to underlying pressures. “However, market-based inflation expectations have softened at all horizons and have stabilized at the 2% target from 2025 onwards,” they emphasize in their spring analysis.
The ECB has maintained a restrictive monetary policy, with the deposit facility rate at 4%. “It is expected that the policy rate will remain at this level until the third quarter of 2024,” the OECD points out. In this regard, the organization predicts that monetary policy will remain restrictive “for some time” with the aim of durably reducing underlying inflationary pressures.
As for growth, the think tank predicts that it will “remain weak” in the Eurozone. Specifically, they forecast a GDP expansion of 0.7% in 2024, and it will increase to 1.5% in 2025 “as internal demand recovers”.
“It is expected that growth will gradually recover, in a context of easing financial conditions, supported by benign energy and commodity prices and reduced uncertainty,” the document states.
Thus, real wage growth and employment resilience will support a recovery in consumption, as disinflation continues during the projection period, combined with investment supported by the Next Gen. All of this will drive growth in 2025.
In the case of China, the OECD is closer to the growth targets of the Xi Jinping government. Specifically, they expect the Asian giant to grow by 4.9% this year (the Government expects 5%) and looking ahead to 2025, growth will be more moderate, settling at 4.5%.
Milei’s “necessary” fiscal measures
In the case of Argentina, it will be the only G-20 country that will remain in recession in 2024 (-3.3%) and will recover in 2025 (2.7%).
Inflation in the Rio de la Plata country will remain extremely high, but President Javier Milei’s fiscal adjustment measures were described as “necessary”. “High inflation, a significant but necessary fiscal adjustment, and political uncertainty will weigh on private consumption and investment for most of 2024. The gradual lifting of import restrictions and exchange controls will eventually boost the recovery of internal demand” in 2025.
