US economic growth forecast cut as inflation ‘remains high’: OECD

The Organization for Economic Co-operation and Development (OECD) now expects the United States to grow more slowly this year and next, according to its September interim economic outlook report.

According to the report, the United States is forecast to grow 1.5 percent in 2022 — a full percentage point drop from the June estimate of 2.5 percent — and 0.5 percent in 2023. In the earlier The OECD forecast a growth rate of 1.2 percent in 2023. Last year, the United States recorded growth in gross domestic product (GDP) of 5.7 percent. The 1 percent drop in the estimate for 2022 is the second-biggest fall after the OECD revised down China’s GDP growth for the year by 1.2 percent.

“In the United States, the spread between 10-year and 2-year government bond yields has turned negative, a phenomenon that has historically been followed by cyclical downturns,” the report said.

The OECD kept the global GDP growth rate for 2022 at 3 percent but cut the rate for 2023 by 0.6 percent to 2.2 percent.

The United States has seen increases in labor and unit labor costs, putting “upward pressure” on a wide range of goods and services. In July 2022, 62 percent of consumer goods and services had an inflation rate greater than 4 percent.

Inflation has “further spread” around the world. Tight labor market conditions are pushing up wages and contributing to broad-based inflation, the report found.

The OECD expects headline inflation to peak in most economies in the current quarter. Inflation is projected to fall further in the fourth quarter and throughout 2023. But even if inflation eases, it “will remain at high levels,” the organization said.

In the United States, inflation “has now peaked,” the report said. With monetary tightening starting earlier in the United States compared to Britain or the eurozone, the country is expected to make further progress in reducing inflation to the Federal Reserve’s 2 percent inflation target.

The OECD expects interest rates in the United States to rise from 4.5 percent to 4.75 percent due to “visible labor market pressures” the country is facing.

Fed actions

The Fed recently raised interest rates by 75 basis points to between 3 and 3.25 percent. At a news conference, Federal Chairman Jerome Powell said inflation was “too high”.

He predicted interest rates would rise even higher and remain at hawkish levels “for some time” as the central bank tries to control inflation.

Members of the Fed’s monetary policy arm, the Federal Open Market Committee (FOMC), expect rates to peak at 4.6 percent by the end of next year and drop to 2.9 percent by the end of 2025 reducing demand in the US economy, Powell added.

In a Sept. 15 interview with Fox News, Kenneth Rogoff, former chief economist at the International Monetary Fund, said that while the Fed could hike rates by as much as 5 percent in 2023, that still may not be enough to cool inflation under 4 percent or 3.5 percent.

The 12-month CPI, a measure of annual inflation, has remained at or above 7.5 percent for every single month this year.

“The Fed will have to ask itself a difficult question. How long are they willing to take a downturn? How much risk of a big downturn are you willing to take?” Rogoff said.

consequences

Naveen Athrappully is a news reporter at The Epoch Times, covering business and world events.

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