The OECD has warned of “persistent” high consumer prices around the world including in Australia, strengthening the case for further interest rate rises despite “visible” effects from previous increases.
The Organisation for Economic Co-operation and Development (OECD) released its interim economic outlook on Tuesday, titled Confronting Inflation and Low Growth. It said that although headline inflation is declining steadily “core inflation remains persistent in many economies” and this “would require additional policy tightening”.
In Australia, it estimates core inflation of 5.9% in 2023, up 0.4 points from its June estimate, and 3.3% in 2024, up 0.1.
The OECD blamed “cost pressures and high margins in some sectors” for core inflation, which measures the change in prices of goods and services, excluding items frequently subject to volatile prices, like food and energy.
Estimates for growth in Australia are flat at 1.8% in 2023 and down 0.1 in 2024 to 1.3%. But global growth is projected to be up 0.3 points compared with the June estimate to 3.0% in 2023 then down 0.2 to 2.7%.
The OECD warned that “risks remain tilted to the downside”, including that the “adverse effects of higher interest rates could prove stronger than expected” and “a sharper-than-expected slowdown in China is an additional key risk that would hit output growth around the world”.
The observation echoes the treasurer, Jim Chalmers’, warning earlier in September that there is no guarantee Australia’s economy is heading for a soft landing.
The OECD said the start of 2023 was “stronger-than-expected” thanks to “lower energy prices and the reopening of China” but global growth is now expected to moderate.
“The impact of tighter monetary policy is becoming increasingly visible, business and consumer confidence have turned down, and the rebound in China has faded.”
“Global GDP growth is projected to remain sub-par in 2023 and 2024, at 3% and 2.7% respectively, held back by the macroeconomic policy tightening needed to rein in inflation.”
The OECD, which is now headed by former Australian finance minister Mathias Cormann, recommended that “monetary policy needs to remain restrictive until there are clear signs that underlying inflation pressures have durably abated”.
It noted interest rates “appear to be at or close to a peak in most economies” with further rises now “finely balanced” decisions.
The release of the outlook comes as Michele Bullock begins her term as Reserve Bank governor in Australia, taking the reins after 12 interest rate rises to tackle high inflation.
The RBA faces a dilemma about whether to keep rates on hold due to easing inflation or to continue monetary tightening due to strong labour market results.
Minutes from the September meeting of the Reserve Bank show the slowing pace of inflation was enough to keep rates on hold, but the board was aware higher petrol prices could upset the balance.
The RBA board chose to leave the cash rate steady at 4.1% for the third time in a row in September, although the minutes showed another increase was discussed.
The central bank is aiming to have inflation back within its two-to-three per cent target range by late-2025.
In July, inflation sunk to 4.9% from 5.4% in the month prior.
The RBA kept the possibility of more tightening alive “should inflation prove more persistent than expected”.
“Members noted that the recent rise in petrol prices – an important input for households’ inflation expectations – highlighted that the process of returning inflation to target could be uneven,” the minutes said.
Fuel prices have been marching upwards due to oil supply cuts and the weakening Australian dollar.
Chalmers said the OECD report “shows the global economy is in an unpredictable place with growth forecast to slow considerably over the coming year”.
“While we expect our economy to slow considerably over the coming year and the unemployment rate to tick up, we enter this period of uncertainty from an enviable position,” he said in a statement.
“We have a strong labour market, wages are getting moving again, and we continue to get good prices for what we sell to the world.”
The OECD noted that “governments are faced with mounting fiscal pressures from rising debt burdens and additional spending on ageing populations, the climate transition and defence”.
“Enhanced international cooperation is needed to ensure better coordination and faster progress in carbon mitigation efforts.”
Chalmers noted that “the OECD stresses the importance of countries rebuilding their fiscal buffers so they are in a position to respond effectively to future shocks”.
“This is consistent with the Albanese government’s budget strategy and is one of the reasons why delivering a surplus in 2022-23 is so important.”
