Resilient to the Challenges of the New Reality

Main points

• Despite significant falls in headline inflation in advanced economies, thanks to tighter monetary policies and lower commodity prices, core inflation remains elevated. We forecast that OECD annual inflation (excluding Turkey) will fall from 5.9 per cent last year to 3.8 per cent in 2024 and 1.8 per cent in 2025.
• With inflation falling steadily and economic activity stagnant, we expect the European Central Bank (ECB) to start interest rate cuts in June. The Federal Reserve (Fed) may delay rate cuts until September due to stickier inflation in the United States. We expect further reductions through next year as inflationary pressures continue to weaken.
• Rising interest rates, particularly government bond yields, have put pressure on fiscal balances in advanced economies. Increased costs of debt service leave governments with little room for positive fiscal policy actions in 2024 and 2025 at a time when government debt levels are already running at high shares of GDP.
• Continued uncertainty due to war in Ukraine and tensions in the Middle East poses considerable risks to economic activity and inflation. Our forecast and revisions since our Winter Global Economic Outlook are summarised in table 1 and our fan charts for global GDP and (OECD) inflation are shown in figures 1 and 2.