OECD chief economist calls for governments to cut fiscal support

The time is ripe for countries to get their public finances into better shape, the new chief economist of the OECD has said, with the coronavirus pandemic and energy crisis fading into the background.

Speaking to the Financial Times in Paris ahead of presenting the international organisation’s global forecasts on Wednesday, Clare Lombardelli said the world economy was set to expand by 2.7 per cent in 2023 and 2.9 per cent in 2024.

The better backdrop meant it was now time for governments to rebuild their fiscal buffers, helping to fight high inflation and putting countries in a better position to deal with the costs of an ageing population.

“We have seen understandable and necessary fiscal support in response to the [Ukraine] war and the pandemic . . . [but] now is the time that blanket fiscal support needs to be withdrawn,” she said.

Lombardelli, who joined the OECD from the UK Treasury, said offering support only “for people who really need it” would also be more consistent with central banks’ rate rises.

The US and European countries have ratcheted up spending since the start of the pandemic. They now face far higher bills to finance that support following the surge in global borrowing costs. Lombardelli said there was “no expectation” about when economies would lower their debt burdens. “We don’t want forever more to be ratcheting up levels of debt. That does make countries less resilient.”

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Lombardelli said that while a few countries might have exceptional circumstances, “on average, we do need to get debt levels down”.

The OECD’s main forecasts show the global economy weathering the squalls of earlier this year, when banks failed on both sides of the Atlantic. The US will avoid a recession, Germany will recover from the recent contraction in its output and China’s growth will meet Beijing’s 5 per cent target for the year, the OECD has forecast.

“The global economy is growing and unwinding from the shocks we’ve seen over the past couple of years,” she said, while pointing out that this year is expected to be weak by historical standards.

The immediate priority should be ensuring that inflation returns to its target levels of about 2 per cent in most advanced economies, Lombardelli said, adding that this would require interest rates to remain at their recent high levels for some time or rise slightly higher.

“Forecasters, both national and international, have got the persistence of inflation wrong. That is why you might need to see more tightening of monetary policy.”

She said that central bankers would have to watch wages particularly closely for signs of inflation becoming entrenched.

As part of its Economic Outlook, the OECD looked at nine countries to see whether companies had driven inflation higher by increasing margins. It found only modest evidence of higher profits, with most of this concentrated in mining and energy companies.

It was still worth remaining vigilant about “greedflation”, Lombardelli said, as companies could still try to defend profit margins should workers call for wage rises.

“The effects are not massive,” she said. “But there is something there. Labour costs are increasing, profits are increasing, but we don’t think [greedflation] is going to be an ongoing thing.”

The one country with a more troubling immediate inflation problem was the UK, which she said had a “particular issue about the labour market”. The size of the workforce had fallen after the pandemic, raising pressure on companies to pay people more, she said.

The other global economic issue preoccupying policymakers in recent months has been trade with China. Led by the US seeking to “de-risk” its relationship with Beijing, the G7 has stressed the importance of resilience in global supply chains without seeking to “decouple” the North American, European and Japanese economies from China.

For the OECD, traditionally a supporter of free trade, the renewed desire for national security to trump economic efficiency has been tough. Lombardelli said she wanted to make sure everyone still understood the case for liberalised commerce and exchange of goods and services.

“Trade is a benefit to people around the world. It brings huge benefits in terms of choice, prosperity and [lower] prices. It’s perfectly sensible and reasonable for countries to think about supply chains . . . but what’s important is to think about it in a way that doesn’t undermine the wide rules-based global trading system.”

In its outlook, the OECD noted the US had significantly cut the proportion of its trade with China, even though the overall level of trade had increased since 2018. European countries had increased the proportion of their trade with Beijing.

Lombardelli said she wanted to focus her efforts on using the OECD’s “best in the world” resources to provide the data needed to steer economic change and boost long-term growth prospects.

“Everyone gets very excited about monetary policy and the short-term stuff, but what enables economies to grow and what changes peoples’ wellbeing . . . are these structural things. The OECD can bring the weight of its intellectual analysis to these questions.”