By Laura Betschka, Natalia García Soto and Max Glanville.
This blog is based on the editorial and Chapters 1 and 2 of the OECD Economic Outlook released in December 2024.
In the past few years, the global economy has demonstrated remarkable resilience despite being subject to major shocks, such as the pandemic and an energy crisis. Outcomes have varied significantly across countries. In the United States, growth remained particularly solid, fuelled by private consumption and real wage gains. On the contrary, many other advanced countries, especially in Europe, experienced more sluggish growth or even contractions. Indonesia and India have continued to grow strongly. In our recently published OECD Economic Outlook we project world GDP growth at 3.2% before edging up slightly to 3.3% in 2025 and 2026 (Figure 1).
Figure 1. GDP projections from the OECD Economic Outlook November 2024
Note: Revisions relative to the latest estimates from the May 2024 Economic Outlook. India projections are based on fiscal years, starting in April. World and OECD aggregates use moving nominal GDP weights at purchasing power parities.
Source: OECD Economic Outlook 116 databases; and OECD Economic Outlook 115 database.
Inflation has returned to central bank targets in the majority of the advanced and emerging-market economies covered by the OECD Economic Outlook. At the same time, labour markets are easing but remain generally tight, with unemployment rates still near historical lows in many countries. This labour market tightness, along with falling inflation, has led to solid real wage growth in many countries. Yet, in many advanced economies consumption growth remains subdued. A contributing factor is that consumer confidence on average remains low in both advanced and emerging market economies. Research in the OECD Economic Outlook indicates that elevated food and energy prices weigh particularly on consumer sentiment, as households are particularly sensitive to these essential expenses. In many countries, the costs of food and energy have increased more than household incomes since before the COVID-19 pandemic, leading to a higher cost of living.
The relatively benign baseline outlook masks significant downside risks:
- Rising trade tensions: Trade has been a fundamental driver of global growth, job creation and declining poverty in the past decades. Rising trade tensions and an increase in protectionism might disrupt supply chains, raise consumer prices, and negatively impact growth.
- A renewed escalation of geopolitical tensions and conflicts could disrupt trade and energy markets, potentially fuelling inflation and constraining economic growth.
- High levels of public debt: Some emerging market economies and low-income countries are now in debt distress or are at high risk of it. Public debt is also a pressing concern for advanced economies. Ageing populations, increased spending on defence and the investments needed for the green transition amplify these challenges.
- Financial market volatility: Downside surprises may prompt sharp equity and bond market corrections, heightening volatility and systemic risks, particularly in the increasingly interconnected network of non-bank financial institutions.
Policy has a pivotal role to play in managing risks and unlocking prospects for strong, resilient and sustainable growth. This requires concerted action on monetary, fiscal, and structural policies.
As inflation pressures decline further, central banks should continue to ease monetary policy. Still, central banks need to act cautiously, considering incoming data and thoroughly assessing policy actions. Failing to durably contain inflation would increase the risks to growth and real incomes.
Governments need to put in place credible fiscal consolidation strategies. Fiscal prudence is crucial amid high public debt levels and rising spending pressures. Governments must balance easing fiscal strains with sustaining economic growth.
A Special Chapter of the recent OECD Economic Outlook focuses on labour shortages – an important challenge in many economies. Labour and skill shortages have risen over the past decade and intensified during the pandemic. Although labour markets are easing, shortages persist in many sectors, especially health and long-term care and information technology. On average, one out of four firms in OECD countries report severe labour shortages, defined as difficulties filling all or most vacancies. Such shortages, particularly in technology-intensive firms, hinder business expansion and adoption of productivity-enhancing innovations. Population ageing, which leads to a shrinking labour force, risks further exacerbating the labour shortage problem.
To reduce growth bottlenecks from labour shortages, key policy priorities include up-skilling and re-skilling of the workforce, with a focus on lifelong learning and digital skills training to improve skills supply and address mismatches. In addition, policies to increase the participation of women, such as the provision of quality and affordable childcare facilities and the promotion of a gender balance in occupations. Targeted migration and integration policies could also increase the labour supply, including easing restrictions on residence permits and speeding up the recognition of foreign diplomas. Ensuring tax and benefit systems are designed to encourage work, including through well-targeted in-work benefits and the removal of implicit biases against second earners, can further boost labour force participation. Other policy areas to be considered include promoting youth participation by stimulating vocational training and retaining older workers by promoting healthy ageing and pension reforms.
In sum, while the global economy is expected to remain resilient, uncertainties around the central growth scenario are high. In the short term, it is essential for policymakers to ensure macroeconomic stability by ensuring that inflation is durably realigned with central bank target and ensuring sustainable public finances. In the medium term, efforts should focus on lifting growth potential through fostering multilateral dialogue and ambitious structural reforms, for example by investing in infrastructure, reform migration policies and creating a pro-competitive regulatory environment.
Reference
OECD (2024), OECD Economic Outlook, Volume 2024 Issue 2: Resilience in uncertain times, OECD Publishing, Paris, https://doi.org/10.1787/d8814e8b-en.