High inflation, low consumer confidence and falling stock indices are expected to lead a major softening of growth in euro zone over the next six to nine months, the Organisation for Economic Co-operation and Development (OECD) has warned.
The agency said composite leading indicators (CLIs), which are driven by high-frequency data such as order books, confidence indicators, building permits, long-term interest rates and new car registrations, signal growth losing momentum across major industrialised economies.
“In the UK, Canada and in the euro area as a whole, including Germany, France and Italy, the CLIs continue to anticipate growth losing momentum, dragged down by high inflation, low consumer confidence and declining share prices,” it said.
Ireland is still expected to record strong growth of 9 per cent this year, according to the Central Bank, but consumption is expected to slow in the face of higher prices.
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Among large OECD economies, the composite indicator for the US now signals growth losing momentum, a change from last month’s stable growth indication, the OECD said.
Among major emerging-market economies, growth is expected to lose momentum in China (industrial sector) and to slow in Brazil. In India, the CLI points to stable growth.
However, the OECD cautioned that ongoing uncertainties related to the war in Ukraine and Covid-19 are resulting in higher than usual fluctuations in the CLI components.
As a result, the indicators should be interpreted with care and their magnitude should be regarded as an indication of the strength of the signal rather than as a measure of growth in economic activity.
The latest CLIs suggest that peak has now passed in several major economies, the OECD said. A drop in momentum is visible in the latest CLIs for Canada, Germany, Italy and the United Kingdom, it said.
In Japan and the euro zone as a whole, the indicators signal stable growth, the OECD said, though the peak has also passed while, in the US, the composite measure also indicates stable growth, although the level is now below its long-term trend.
Separately, Federal Reserve Bank of Kansas City president Esther George, who dissented last month against the US central bank’s jumbo 75 basis-point increase in interest rates, cautioned that rushing to tighten policy could backfire.
Ms George, whose vote at the June meeting of the Federal Open Market Committee was the first dovish dissent of her career, said she understood the desire to raise rates rapidly to dampen surging inflation but was concerned it could do more harm than good.
“This is already a historically swift pace of rate increases for households and businesses to adapt to, and more abrupt changes in interest rates could create strains, either in the economy or financial markets, she said. — Additional reporting Bloomberg
