The OECD’s Interim Economic Outlook Report supports the recent turn in monetary policy and recognizes that there is room to lower interest rates. At the same time, it urges central banks to be prudent and carefully judge the timing and scope of reductions to contain underlying inflationary pressures, while also calling upon governments to undertake decisive fiscal actions and intensify consolidation efforts in order to ensure debt sustainability.
TUAC warns that, far from restoring growth, these policy recommendations are likely to destabilise the economy and the labour market:
- The unwinding of monetary restriction should not be confused with monetary stimulus. The OECD is counting on a gradual easing of interest rates to underpin growth. However, much of the corporate and mortgage debt that was borrowed at historically cheap interest rates is yet to mature and will need to be refinanced in the near future – as the OECD itself acknowledges in its analysis. Even if interest rates are lowered from their 2024 peak, this will mean higher interest payments, and an additional squeeze on household and corporate finances that will further drag down demand, investment, and growth.
- Fiscal cuts while monetary restriction is still in play will damage economic performance. In simultaneously calling for the intensification of fiscal consolidation efforts while policy interest rates are still in restrictive territory, the OECD is promoting a policy mix that will hamper growth and recovery and may push economies into recession. This is especially the risk in Europe where fiscal cuts of 0.75 to 1.2% of GDP each year for the next four years are in the pipeline.
- Labour markets do not stay resilient forever. Weaknesses in labour markets are already starting to show , and a restrictive macroeconomic policy mix will only widen them further. Once unemployment starts rising noticeably, there is a danger that it will feed on itself as higher unemployment dampens demand, in turn triggering more layoffs.
TUAC urges the OECD to:
- Insist upon the need for central banks to not “fall behind the curb”. Interest rates need to be cut at a sufficiently quick pace to prevent a deterioration of the economy and labour market. In this respect, the OECD should note the recent commitment from the US Federal Reserve to dial back policy restraint more strongly in case of unexpected labour market weakness.
- Make the case for realistic and intelligent fiscal rules. To avoid harming economic performance, fiscal adjustment rules need to consider the negative feedback effects of austerity on growth and jobs. Fiscal rules also need to recognise the longer-term benefits of borrowing for investment and the resulting positive feedback effects on the sustainability of public finances.
Veronica Nilsson, TUAC’s General Secretary, says:
“Recognising that there is room to lower policy rates is a move in the right direction, but the OECD downplays the risk that central banks went too far and too fast in hiking interest rates in the first place. Now that inflation is approaching target, bolder steps are required to bring policy rates down in order to prevent a weakening of the economy and the labour market."
And concludes:
"The return to fiscal consolidation and structural reforms promoted by the OECD will not help economies turn the corner but will rather hamper recovery and hurt working people.”
