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The OECD headquarters, in Paris, on Sept. 3, 2009.Charles Platiau/Reuters

The global economic outlook has improved from a few months ago as the inflation shock eases, but rising interest rates will keep risks high, the OECD said on Friday, hiking its growth forecasts for major economies.

After growth last year of 3.2 per cent, the world economy is on course to expand 2.6 per cent as central bank tightening takes full effect, the Organization for Economic Co-operation and Development said in its interim economic outlook.

The Paris-based organization raised its forecast for global growth from 2.2 per cent in its last Economic Outlook in November, citing a decline in energy and food prices and China’s easing of its anti-COVID restrictions.

Looking to next year, global growth was expected to accelerate to 2.9 per cent – compared with a November forecast of 2.7 per cent – as the hit to household incomes from high energy prices faded.

The OECD forecast that inflation in the Group of 20 major economies would fall from 8.1 per cent last year to 5.9 per cent this year and further decline to 4.5 per cent in 2024 – still well above targets despite interest rate hikes by many central banks.

It said the full impact of higher interest rates was hard to gauge, warning that increased stress for borrowers could translate into losses for some banks, citing the recent collapse of Silicon Valley Bank in the United States as an example.

Setting aside turmoil in financial markets following SVB’s failure and continued worries about Swiss lender Credit Suisse, the European Central Bank hiked interest rates by a further half percentage point on Thursday to fight inflation.

The OECD projected that central bank policy rates would peak at 5.25-5.5 per cent in the United States and 4.25 per cent in the euro area and Britain with a decline in inflation possibly allowing for a “mild” easing next year.

The OECD forecast that U.S. economic growth would slow from 1.5 per cent this year to 0.9 per cent next year as higher interest rates cooled demand. With the U.S. labour market holding up better than expected, the forecast for this year was up from 0.5 per cent in November and down from 1.0 per cent for 2024.

Boosted by the easing of anti-COVID measures, the Chinese economy was seen growing 5.3 per cent this year and 4.9 per cent in 2024, up from November forecasts for 4.6 per cent and 4.1 per cent respectively.

The outlook for the euro area had also improved thanks to a drop in energy prices with the 20-nation bloc expected to see growth this year of 0.8 per cent followed by 1.5 per cent in 2024. The OECD had previously forecast 0.5 per cent and 1.4 per cent growth respectively.