By Assis Moreira
The Organization for Economic Cooperation and Development (OECD) published today its interim global economy report.
The assessment is that the prospects have improved slightly but remain fragile.
Regarding Brazil, it foresees modest growth this year and next year.
In 2022, global economic growth was 3.2%, about 1.3 percentage points weaker than expected, because of the war in Ukraine, the cost-of-living crisis, rising interest rates, and the continuing turmoil in China.
For this year, the OECD’s central scenario is now for a slight recovery compared to that projected in November, with growth at 2.6% (2.2% before) and rising to 2.9% in 2024.
Except for China and Japan, all other G20 economies are expected to grow slower in 2023 than in 2022.
But the performance of the eurozone, the US, and China may be better than initially expected.
Lower commodity prices and the full reopening of China underpin the modest upward revision to growth projections in 2023; the growth benefits of these changes are likely to be limited to the near term, according to the OECD.
Among the emerging economies, growth is expected to be 5.3% in China, 5.9% in India, and 4.7% in Indonesia.
Economic expansion in several other emerging countries, including Brazil and South Africa, is projected to be slow, around 1% on average in the next two years.
For Brazil, the estimate is for an expansion rate of 1% this year, compared to 1.2% in November.
For 2024, 1.1%, compared to the previous 1.4%.
But a confirmed recovery in China and a better performance from the US will help Brazil, notes Alvaro Pereira, the current chief economist of the OECD.
In the OECD scenario, inflation is expected to remain above target in Brazil and Mexico in 2023, but to decline within the upper half of the target range by the end of 2024, helped by the first measures to tighten monetary policy.
It predicts that in Brazil, the monetary tightening already done could allow some easing of interest rates starting in the second half of this year, while India, Indonesia, Mexico, and South Africa would begin lowering rates only in 2024.
The new projections coincide with turbulence in the banking market.
OECD’s current chief economist Alvaro Pereira notes that volatility in financial markets has increased and should be monitored but that inflation remains too high and should be the primary concern for central banks.
‘Regarding the financial sector, the risks have increased, but banks are much more capitalized and less exposed to risks that they had in 2008,’ said Pereira, clarifying that the entity has no scenario of a new financial crisis.
The war in Ukraine continues to weigh on global production, with uncertainties and persistent risks related to food and energy security, for example.
There is no expectation of peace in the short term.
“Our central scenario is that the conflict will continue,” Pereira said.
For the OECD, monetary policy needs to remain tight until there are clear signs that inflationary pressures are reduced in a lasting way.
In the OECD’s view, additional interest rate increases are still needed in many economies, including the United States and the euro area.
Higher interest rates could also have stronger than expected effects on economic growth, particularly if they expose underlying financial vulnerabilities.
The impact of tighter financial conditions could be felt throughout the economy over time, particularly on private investment.
It notes that the differential between domestic and US interest rates will likely remain an important policy consideration, especially in countries with heavy foreign currency-denominated debt and where inflation expectations are particularly sensitive to food and energy prices in domestic currency.
The OECD mentions signs of the impact of tighter monetary policy have begun to appear in parts of the banking sector, including the regional banking sector in the United States.
It says that in several economies, real and expected credit growth has slowed, even turning negative in some recent bank lending surveys, including in the euro area.
This is reflected in the contraction of the money supply in several large economies after the strong growth during the pandemic.
The OECD says that increased pressure on households and businesses and greater potential for loan defaults raise the risks of potential losses at banks and non-bank financial institutions.
Sudden changes in market interest rates and the current market value of securities portfolios can further expose risks in financial institutions’ business models, as highlighted by the failure of a US Silicon Valley bank recently.
Furthermore, it notes that experience suggests that downturns in housing markets can exert a considerable drag on economic activity and significantly increase financial risks.
For the OECD, several emerging economies may face increasing difficulties in servicing high debt.
It notes that tighter global financial conditions, continued increases in policy rates in developed economies, and persistent inflationary pressures limit the room for maneuvering in most emerging economies.
With information from Valor