OECD Chief Economist Clare Lombardelli foresees an easing of inflation near set targets in most countries by the end of next year, while calling on EU monetary policy-makers to carefully consider decisions that don’t jeopardize growth but at the same time restrict rising prices. As per Greece, she reiterated the OECD’s forecast of ‘robust growth’, even in the face of headwinds, and the country’s strong post-Covid recovery.
Inflation seems more persistent than initially expected. What is your assessment and what are the problems in the effort to bring inflation down? Is rising interest rates the best way?
Headline inflation has been coming down in many countries but core inflation has remained stubbornly high. We project inflation to ease gradually towards targets in most economies by the end of next year, as the impact of monetary policy tightening is felt through the economy. However, there is a substantial risk that inflation could turn out to be more persistent. Significant additional monetary policy tightening may then be required to lower inflation, raising the likelihood of stress in financial markets. Monetary policy is the tool to address the inflation problem and the effects of tightening are already working their way through. In addition, fiscal policy should align with monetary policy and tighten in many countries, through withdrawal of broad-based energy-related support in the near term.
After a fairly positive 2022 for the EU countries what are the challenges they face in 2023? How difficult will it be for the EU to return to a path of more prudent policies, and what should the priorities be?
EU countries face several challenges in 2023. A key concern is of course elevated inflation. Russia’s war of aggression against Ukraine is still a major source of uncertainty. A critical shortage of energy supplies in Europe has been avoided, but the risk of price spikes and even shortages for next winter has not disappeared. Trade related tensions remain a further concern.
To bring down inflation while not jeopardizing growth, monetary policymakers need to walk a tightrope. Monetary policy needs to remain restrictive but any decisions need to be carefully calibrated. Ensuring the sustainability of the public finances has also become more challenging. Almost all countries have higher budget deficits and debt levels than before the pandemic, debt service costs are higher and many face rising future spending pressures. Careful choices are needed to preserve scarce budget resources for future policy priorities, particularly for investments in clean energy and energy infrastructure.
With interest rates increasing, a war raging in Ukraine, and a more fragmented global economy, what challenges you see ahead for the world economy and what would your suggestions be to deal with the problems?
In our Economic Outlook launched today we see signs that global growth is recovering even if the upturn remains fragile. Smart fiscal and monetary policies are needed to secure this recovery and mitigate risks. But, we face a recovery to low trend growth and looking ahead, challenges are mounting: ageing will intensify and governments will need to deliver on the climate transition by significantly ramping up investment in green technologies and innovation.
To revive trend growth, governments will need to step up on reforms to boost competition and productivity, strengthen investment and labor force participation.
Crucially, in an interconnected world, countries have to overcome geopolitical frictions and work together on issues of common interest, including climate change mitigation; open markets and trade; economic, food and energy security; and resolving the pressing issue of debt burdens in low-income economies.
About Greece. How do you assess the country’s economic performance and what vulnerabilities you consider more critical?
Greece’s economy has continued to grow robustly in spite of headwinds. It’s recovery from the COVID-19 crisis was strong and it has navigated the surge in energy prices well. In our latest Economic Outlook, released on 7 June, we project growth to remain robust, with real GDP increasing by 2.2% in 2023 and 1.9% in 2024.
There are challenges for Greece to maintain this momentum.
In the near-term, fiscal policy can help ensure that inflation returns to target. Achieving the primary budget surpluses as laid out in the government’s medium-term fiscal plans will help reduce some of the capacity pressures. It will also support Greece achieving an investment-grade sovereign debt rating, which will expand access and lower costs for financing the new investments needed by the public and private sectors.
To sustain growth into the longer-term, it will be key that Greece continues improving the investment climate, how the state functions and makes deeper progress in raising adults’ skills. Fully implementing Greece’s Recovery and Resilience Plan would be a substantial achievement, but Greece’s reform needs will remain great.
Meanwhile the public debt stock was at 171% of GDP at the end of 2022. Most is long-term, at low, fixed interest rates to official creditors, but repayments due will start rising from late this decade, underscoring the need to maintain fiscal discipline and to expand the economy’s productive capacity.
What should the country’s priorities be now? What are the reforms that Greece needs? In addition how could the country boost competitiveness on one hand and the level of wages on the other?
In our most recent Economic Survey of Greece, released at the start of this year, we highlighted three reform priorities for Greece.
First is to fully restore health across the banking system and clear the legacy of bad loans. Much progress has been made but there are still pockets of bad loans. Boosting banks’ capital bases can help them to sustainably increase lending and improving their efficiency. This will also help Greece achieve an investment-grade sovereign debt rating, unblocking greater access to lower cost finance across the economy.
Second is to raise workers skills, and especially help younger workers enter employment. Encouraging workplaces to adopt more flexible work arrangements, and strengthening incentives for employers to hire young workers with limited experience, can help.
Third is to continue the progress to becoming a net-zero greenhouse gas emissions economy. Ensuring a consistent price on emissions will help. Substantial investments in improving the transport system, developing alternatives to road transport and improving energy efficiency of buildings will be needed. Helping workers across the economy transition to the new opportunities of the green and more digital economy will require a substantial boost to active labor market and training policies.
