The horizon is clearing. In its new growth forecasts, published this Thursday, the Organization for Economic Co-operation and Development (OECD), sees global gross domestic product (GDP) growing this year at the same rate as last year at 3.1% before to settle at 3.2% in 2025. This renewed activity will be due to higher growth in real incomes and the expected drop in key central bank rates.
In fact, the decline in inflation is faster than expected. Consumer prices should fall as cost pressures ease. Inflation will fall to 5.9% this year after a peak of 7.9% in 2022. In 2025, the OECD expects an annual increase of 3.6%.
For the Organization’s chief economist, Clare Lombardelli, “cautious optimism has begun to sweep through the global economy, despite modest growth and the lingering shadow of geopolitical risks. (…) In the private sector, confidence is improving. This recovery which is beginning differs in its modalities depending on the regions of the world,” she writes in the preamble to the report. There remains a big black spot: public finances.
Public debt worries
“The budgetary situation is worrying. Public authorities must face growing debt, as well as the increase in spending required by demographic aging, climate change mitigation and defense needs,” warns the chief economist. The increase in the cost of servicing the debt amplifies the deterioration of public finances. The expected renewed growth should therefore encourage governments to act.
In the United States, growth is expected at 2.6% this year before a probable slowdown in 2025 (1.8%). The pace of GDP growth, faster than expected in 2023, is due to both the sharp increase in consumption (households and public administrations) and investments. Income growth continues to slow. Overall, there is little reason to believe that wages will fuel renewed inflation in the future. And the American Federal Reserve will be able to begin easing its monetary policy in the second half of 2024, once inflation has fallen towards 2%.
On the other hand, the American budget deficit is expected to remain significant (-7.6% of GDP in 2024). Despite the elimination of most extraordinary support measures for households and businesses, the deficit is high because the United States is entering a period where spending on social programs increases with demographic aging and the base of Taxation has contracted over the past decade. Public debt is expected to reach 125% of GDP in 2024 and continue to grow in 2025.
Europe lagging behind
Europe, for its part, is stuck. GDP growth is expected to remain weak at 0.7% in 2024 before rising to 1.5% in 2025 thanks to the recovery in domestic demand. Wage increases in tight labor markets and the increase in real incomes thanks to the decline in inflation should stimulate private consumption.
In detail, Germany’s GDP is expected to grow by 0.2% in 2024 and then by 1.1% in 2025. Disinflation and rising wages will support household income and consumption. Private investment will gradually improve, with the relocation of supply chains, digital transformation and the development of renewable energy. Exports will gradually recover as global demand strengthens.
Insufficient pension reform in France
For France, the OECD expects GDP growth of 0.7% this year then 1.3% in 2025. Public debt is worrying. It stood at nearly 111% of GDP at the end of 2023. A budgetary plan is necessary, recommends the organization. The reduction in spending in 2024 is welcome, but additional consolidation is essential. The OECD advises restricting the wage bill of public administrations and rationalizing social, health and tax spending.
“Public spending on retirement, health and long-term care is expected to increase by around 4% of GDP by 2040 due to demographic aging,” underlines the organization. Who believes that the pension reform, which came into force in 2023, will undoubtedly not be sufficient to balance the accounts of the pension system.