Economic growth is gaining momentum in the US, Europe and other advanced countries despite temporary setbacks, a leading international organization said on Tuesday.
Smaller government spending cuts and fewer tax increases this year should boost growth in most developed countries, according to the Organisation for Economic Co-operation and Development (OECD). Households and businesses are also in better financial shape and can capitalize on still-low interest rates, it said.
Yet growth will likely slow in developing countries, which now account for more than half of global growth. Countries such as India and Brazil are struggling with higher inflation and falling currencies. Investors have pulled money from those countries as the US Federal Reserve has begun to scale back its bond purchases.
The Fed’s bond buying lowered long-term US rates and sent investors into emerging markets in search of higher returns. Now that US rates may be poised to rise, some money is flowing back out, pressuring developing countries’ currencies and financial markets.
The OECD, a think tank for the world’s most developed countries, forecasts global growth of 3.6 percent this year, up from an estimated 2.7 percent last year. That is similar to estimates from other global organizations, such as the IMF.
In the advanced economies, temporary factors will likely weaken growth early this year, including harsh winter weather in the US and Canada and an impending sales tax increase in Japan, the OECD said. However, growth in most developed economies should then rebound by the second half of the year.
One sign of underlying strength is that global trade has rebounded and last fall began to grow as quickly as it did before the recession, the OECD said, “after an extended period of unusually sluggish growth.”
The organization warned that while the EU’s economy seems to be improving, “so far it is doing so later and at a slower pace than in the other major economies.”
It also warned that the dip in growth in the US over the winter could have longer-lasting repercussions.
“If the recent economic weakness were to durably depress confidence, it could undermine the recovery,” the OECD said.