The conflict in the Middle East is reviving the specter of inflation and hobbling the global economy just as it was showing signs of strengthening at the start of the year, the OECD said yesterday.
In its updated outlook, the Paris-based organization sharply increased its inflation forecasts for major economies and now sees the average rate for the Group of 20 this year jumping to 4 percent — with an even higher pace in the US — rather than the 2.8 percent it predicted in December last year.
Downward adjustments to growth were less dramatic in the short term, but largely because the drag from the Iran war was offset by better-than-expected momentum at the start of the year.
Photo: Benoit Tessier, Reuters
The OECD is the first of the major international economic institutions to formally update forecasts. Other indicators such as business surveys have already begun to point to a synchronized global shock of weaker activity and rising prices.
The organization also warned there is a “significant downside risk” to its projections from further disturbance of exports from the Middle East that would fuel inflation, reduce growth and potentially trigger repricing on financial markets.
“The breadth and duration of the conflict are very uncertain, but a prolonged period of higher energy prices will add markedly to business costs and raise consumer price inflation, with adverse consequences for growth,” the OECD said.
Disruption from the Iran war arrived just as the global economy was picking up tailwinds from investment in artificial intelligence, an easing of US tariff rates and supportive monetary and fiscal policies.
Without the conflict, the OECD said it could have revised up its global growth forecast by 0.3 point for this year. Instead, it left that prediction unchanged at 2.9 percent and trimmed its figure for next year by 0.1 point to 3 percent.
The sudden change of the economic backdrop is also forcing policymakers to change tack. Last week, the US Federal Reserve signaled that any cuts in US borrowing costs remain a long way off. European Central Bank (ECB) officials are considering a possible hike as soon as next month, while Norwegian central bank officials yesterday revealed that they had even discussed a move as soon as this week.
For the US, the OECD expects inflation to jump to 4.2 percent this year, from 2.6 percent last year. Its price outlook for this year is 1.2 percentage point higher than in December, also because the labor market remains tight with slowing net migration and tariffs are adding upward pressure.
“We do think there is a combination of factors that are likely to have a bearing on the inflation outlook in the US,” OECD Secretary-General Mathias Cormann said in an interview with Bloomberg Television.
The organization now expects policy rates to remain unchanged throughout this year in both the US and the UK, while it foresees that the ECB will hike once in the second quarter to ensure inflation expectations remain under control.
“Our current expectation is energy price effect will be temporary, and as such central banks would be able to take that into account,” Cormann said. “But in the end, what we are saying to central banks is that they need to continue to focus very closely on the data as it involves and be very prudent to ensure that inflation expectations are well anchored.”
The 38-member organization also urged governments still carrying large debts racked up through spending during previous crises to refrain from broad-based subsidies and transfers.
“Measures to cushion the impact of higher energy prices should be timely, well-targeted on households most in need and viable firms, preserve incentives to lower energy use and have clear expiry mechanisms,” the OECD said.
ENERGY ISSUES: The TSIA urged the government to increase natural gas and helium reserves to reduce the impact of the Middle East war on semiconductor supply stability Chip testing and packaging service provider ASE Technology Holding Co (日月光投控) yesterday said it planned to invest more than NT$100 billion (US$3.15 billion) in building a new advanced chip testing facility in Kaohsiung to keep up with customer demand driven by the artificial intelligence (AI) boom. That would be included in the company’s capital expenditure budget next year, ASE said. There is also room to raise this year’s capital spending budget from a record-high US$7 billion estimated three months ago, it added. ASE would have six factories under construction this year, another record-breaking number, ASE chief operating officer Tien Wu
The EU and US are nearing an agreement to coordinate on producing and securing critical minerals, part of a push to break reliance on Chinese supplies. The potential deal would create incentives, such as minimum prices, that could advantage non-Chinese suppliers, according to a draft of an “action plan” seen by Bloomberg. The EU and US would also cooperate on standards, investments and joint projects, as well as coordinate on any supply disruptions by countries like China. The two sides are additionally seeking other “like-minded partners” to join a multicountry accord to help create these new critical mineral supply chains, which feed into
For weeks now, the global tech industry has been waiting for a major artificial intelligence (AI) launch from DeepSeek (深度求索), seen as a benchmark for China’s progress in the fast-moving field. More than a year has passed since the start-up put Chinese AI on the map in early last year with a low-cost chatbot that performed at a similar level to US rivals. However, despite reports and rumors about its imminent release, DeepSeek’s next-generation “V4” model is nowhere in sight. Speculation is also swirling over the geopolitical implications of which computer chips were chosen to train and power the new
TECH WINNERS: Taiwan and South Korea reported robust trade, which suggests that they have critical advantages in the rapidly expanding AI supply chain, an official said Exports last month surged to a new high, as booming demand tied to artificial intelligence (AI) infrastructure fueled shipments of advanced technology components, underscoring the nation’s pivotal role in the global semiconductor supply chain. Outbound shipments climbed to US$80.18 billion, the highest ever for a single month, rising 61.8 percent from a year earlier and marking the 29th consecutive month of growth, the Ministry of Finance said yesterday. “The surge was driven primarily by global investment in AI infrastructure,” Department of Statistics Director-General Beatrice Tsai (蔡美娜) said. The mass production of next-generation AI computing systems has accelerated procurement across the semiconductor supply
RSS