MNI POLICY: OECD Sees Global Growth Surge, Mild Inflation

U.S. fiscal stimulus will boost global GDP growth to 5.6% this year and the Federal Reserve should allow the economy to run faster without reacting to short-term price pressures, according to a new OECD forecast Tuesday.

The estimated expansion is up 1.4 percentage points from the Paris-based group's December Economic Outlook report, and would bring global GDP back to pre-pandemic levels by mid-year. The expected pace of growth this year would be the fastest since a gain of 6.5% in 1973 according to World Bank figures.

"The significant fiscal stimulus in the United States, along with faster vaccination, could boost U.S. GDP growth by over 3 percentage points this year, with welcome demand spillovers in key trading partners," the OECD report said. Euro area growth was revised to 3.9% from 3.6% and Japan's to 2.7% from 2.3%.

"In the United States, the likely boost to demand from the new fiscal stimulus measures helps to ease the burden placed on monetary policy to support the economy. Strong demand growth may push up U.S. inflation to some extent, but the new flexible average inflation-targeting framework should allow this to be accommodated without immediate increases in policy interest rates," the report said.

Central banks in other countries should also keep in stimulus in place and avoid reacting to "transitory factors that push up headline inflation," the OECD said. "Cost pressures have begun to emerge in commodity markets due to the resurgence of demand and temporary supply disruptions, but underlying inflation remains mild, held back by spare capacity around the world."

That spare capacity includes 10 million unemployed across the OECD, and total hours worked are still down 5% across major economies, the OECD said.

The report also raised the 2022 global growth forecast to 4% from 3.7%, crediting progress on distributing Covid-19 vaccines.