The Organisation for Economic Co-operation and Development has raised its global economic growth forecast but warned of vulnerabilities exposed by the recent turmoil in the US banking sector.
The OECD expects the global economy to grow by 2.6 per cent this year, up from the 2.2 per cent in its previous forecast in November.
However, it remains under the 3.2 per cent expansion recorded in 2022, according to its updated economic outlook titled A Fragile Recovery released on Friday.
China is expected to record the largest growth at 5.3 per cent, from the OECD's previous forecast of 4.6 per cent. It expanded by 3 per cent last year.
India’s economy is set to expand by 5 per cent, followed by Indonesia at 4.7 per cent, Turkey at 2.8 per cent and Saudi Arabia at 2.6 per cent.
The Paris-based institution handed the UK the joint-biggest upgrade among the Group of Seven countries, but even that will not be enough to stop it being one of the worst economic performers.
The OECD predicted a 0.2 per cent drop in gross domestic product for the UK this year, followed by a tepid 0.9 per cent rebound in 2024.
Those figures were 0.2 percentage and 0.7 percentage points stronger, respectively, than its November forecasts.
The outlook underlines the pessimistic view international forecasters hold on the UK as it struggles with double-digit inflation and a credibility gap after ill-fated fiscal plans last year.
The OECD’s verdict comes after Chancellor Jeremy Hunt unveiled a “budget for growth” aimed at spurring business investment and improving labour supply.
“The United Kingdom is facing very strong cost-of-living pressures,” said an OECD official on Friday.
“Retail energy prices increased more than in comparable economies, while wages are not keeping pace with prices and benefits are uprated, with a relatively long lag.
“And there is continued uncertainty around future trade relationships, with total employment significantly lower than before the pandemic for a range of reasons.
“So, we do believe that the measures that the government is taking to address these issues are going to be very important to improve the economic outlook for the United Kingdom moving forward. But there are some particular challenges that are playing out at the moment.”
In response to the forecasts, Mr Hunt highlighted the UK economy’s stronger-than-expected performance in recent months.
“The British economy has proven more resilient than many expected, outperforming many forecasts to be the fastest-growing economy in the G-7 last year, and is on track to avoid recession,” Mr Hunt said on Friday.
“Earlier this week, I set out a plan to grow the economy by unleashing business investment and helping more people into work.”
The UK’s sluggish 2023 performance compares with growth of 0.8 per cent in the eurozone and a 1.5 per cent expansion in the US, the OECD said.
Global growth will ease to 2.6 per cent this year before picking up again in 2024.
Russian GDP is expected to fall by 2.5 per cent this year and by a further 0.5 per cent in 2024, extending its recession since its invasion of Ukraine.
The OECD raised its growth forecast for the US to 1.5 per cent while the eurozone's was revised to 0.8 per cent, both up from 0.5 per cent in the previous outlook.
It trimmed its 2023 growth forecasts for Japan and Korea, to 1.4 per cent and 1.6 per cent respectively.
“More positive signs have now started to appear, with business and consumer sentiment starting to improve, food and energy prices falling back and the full reopening of China,” the OECD said in its Interim Economic Outlook report.
However, it said “the improvement in the outlook is still fragile. Risks have become somewhat better balanced, but remain tilted to the downside”.
The organisation cited uncertainty over the course of the war in Ukraine, the risk of renewed pressure on energy markets and the impact of rising interest rates.
Central banks worldwide have raised rates in efforts to tame decades-high inflation, but markets fear that the rising borrowing costs could tip economies into recession.
“Signs of the impact of tighter monetary policy have started to appear in parts of the banking sector, including regional banks in the United States,” the OECD said.
“Higher interest rates could also have stronger effects on economic growth than expected, particularly if they expose underlying financial vulnerabilities.”
The monetary tightening has been linked to the collapse of Silicon Valley Bank last week after it booked a $1.8 billion loss on bonds whose prices were brought down by the higher rates.
A second US lender, Signature Bank, also imploded at the weekend while a third, First Republic Bank, was rescued on Thursday by a coalition of its peers through $30 billion in deposits.
Fears of contagion spread to Europe, with Credit Suisse securing a $54 billion lifeline from the Swiss central bank after its shares tanked.
The OECD said the sharp changes in market rates and value of bond portfolios could “further expose duration risks in the business models of financial institutions, as highlighted by the failure of the US Silicon Valley Bank in March”.
But it said that “prompt actions” by US authorities to protect client deposits and regulation that was imposed after the 2008 financial crisis “reduce the risk of broad financial contagion from such events”.
The OECD also upgraded its economic outlook for 2024, with growth of 2.9 per cent, compared to 2.7 per cent in the previous forecast.
Inflation is expected to “moderate gradually” this year and in 2024 after central banks raised their rates to tame consumer prices that have soared since Russia invaded Ukraine.
The OECD trimmed its outlook for headline inflation by 0.1 percentage points to 5.9 per cent in 2023, although it increased its forecast for core inflation, which excludes volatile food and energy prices, to 4 per cent.
The OECD said monetary policy needed to remain restrictive until clear inflationary pressures have been brought down durably as pressures in energy markets could reappear.
The European Central Bank raised its rates by a hefty 50 basis points on Thursday while the US Federal Reserve is expected to meet next week.