High flows of immigration into rich countries are helping to strengthen jobs markets and bolster growth, the Organization for Economic Cooperation and Development (OECD) said on Thursday, as it raised its projection for global economic growth for 2024 to 3.1%, up from a previous projection in February of 2.9%.
“Cautious optimism has begun to take hold in the global economy, despite modest growth and the persistent shadow of geopolitical risks,” the Paris-based organization said in its latest economic outlook.
Also, the global economy would maintain the 3.1% growth rate seen last year and pick up marginally to 3.2% next year, the Organization said, upgrading forecasts dating from February for growth of 2.9% this year and 3% in 2025.
It added that a faster than expected fall in inflation set the stage for major central banks to begin rate cuts in the second half of the year while also fueling gains in consumers' incomes.
United States
However, the speed of recoveries diverged widely, the OECD warned, saying lingering sluggishness in Europe and Japan was being offset by the United States, whose growth forecast was hiked to 2.6% this year from a previous estimate of 2.1%.
Next year US growth was expected to cool to a rate of 1.8%, up slightly from 1.7% in February.
The Organization said the Federal Funds Rate is projected to fall to around 3.75 to 4% by the end of 2025. As for the European Central Bank, it expected a reduction in interest rates from the third quarter to 2.5% by the end of 2025.
Clare Lombardelli, the OECD’s chief economist, said the US economy was looking “remarkably strong”, with increasing evidence of it pulling away from European economies. The more subdued demand outlook in the eurozone could give the European Central Bank scope to cut interest rates sooner than the US Federal Reserve, she said.
Boosted by fiscal stimulus, China's economy was also expected to grow faster than expected with its growth now forecast at 4.9% in 2024 and 4.5% in 2025, up from 4.7% and 4.2% respectively in February.
While weakness in Germany would continue to weigh on the broader euro zone, the bloc's growth was projected to pick up from 0.7% this year to 1.5% next year as lower inflation boosts households' purchasing power and paves the way for rate cuts. The OECD had previously forecast euro zone growth of 0.6% this year and 1.3% in 2025.
Britain's outlook was one of the few to be downgraded with the OECD now forecasting only 0.4% this year compared with 0.7% previously. As interest rates start coming lower from the third quarter of this year, UK growth was seen picking up to 1% in 2025, compared with 1.2% expected in February.
The OECD forecasts also showed Britain's annual rate of consumer price growth was likely to be the highest among G7 countries, both this year and next.
“This forecast is not particularly surprising given our priority for the last year has been to tackle inflation with higher interest rates," British finance minister Jeremy Hunt said in response to the OECD forecast. He pointed to more optimistic forecasts from the International Monetary Fund.
Meanwhile, in Japan, income gains, easy monetary policy and temporary tax cuts would help its growth rate to accelerate from 0.5% in 2024 to 1.1% in 2025, compared with forecasts of 1% for both years previously, the OECD said.
Migration
The OECD said high flows of immigration into rich countries are helping to strengthen jobs markets and bolster growth, as it lifted its outlook for the global economy.
The Paris-based organization said “exceptionally large” migration inflows into OECD countries, including the US, UK, Canada, Spain and Australia, last year had loosened tight labor markets and boosted gross domestic product.
Lombardelli said strong labor force numbers were part of the growth picture in the US and other economies, adding that “extraordinary” rates of migration had “definitely” played a role in supporting growth.
In October, the OECD said that humanitarian crises and labor shortages had driven migration to an all-time high, with 6.1mn permanent migrants moving to its 38 member countries in 2022 and cross-border movement forecast to rise even further in 2023.
“There is a positive role for migration in economies, it clearly helps with productivity, transfer of knowledge and ideas, it helps with labor mobility. That is all incredibly welcome, and in the longer term it will be part of how we cope with the demographic challenge,” the OECD’s chief economist said.
She added that it was unclear how migration was affecting the pace of wage growth — a crucial concern for central banks worried that pay pressures are fueling persistent inflation.
Some economists believe the surge in US immigration is one reason why the growth in jobs has been so much stronger than expected in recent months. The US Congressional Budget Office said in March that net immigration totalled 3.3mn last year — much higher than the Census Bureau estimates that underpin official data on the size of the labor force, according to the Financial Times.
Also, economists say that if the higher estimates of immigration are correct, recent rapid employment gains would not be such a worry for the Fed as they would reflect an expanding workforce. This would make it easier for employers to fill vacancies, where they might otherwise have had to raise pay sharply to hire from an existing, limited pool of workers.
Jay Powell, governor of the Fed, said in an address at Stanford University last month “a strong pace of immigration” that boosted labor supply was one reason why US GDP and employment had grown strongly in 2023, “even as inflation fell substantially.”
