Global growth proved surprisingly resilient in 2023, with lower energy prices and fading supply chain pressures helping inflation to decline more quickly than anticipated. However, recent indicators point to some moderation of growth. In the absence of further adverse supply shocks, cooling demand pressures should allow headline and core inflation to fall further in most economies. By the end of 2025 inflation is projected to be back to target in most G20 countries. Geopolitical risks remain high, particularly in relation to the ongoing conflict in the Middle East following the terrorist attacks on Israel by Hamas. Further upside surprises in inflation could trigger sharp corrections in financial asset prices as markets price in that policy rates may be higher for longer periods of time.

Both headline and core inflation fell during 2023. Some of the factors assisting disinflation over the past year are now dissipating or reversing, while others are vulnerable to geopolitics, extreme weather or unpredictable events. With inflation still above target, and unit labour cost growth generally remaining above levels compatible with medium-term inflation objectives, it is too soon to confirm whether the inflationary episode that began in 2021 is over.

High-frequency activity indicators generally suggest a continuation of recent moderate growth. Across countries, clear signs of strong near-term momentum continue in India, relative weakness in Europe, and mild near-term growth in most other major economies. Global growth, which rose by an estimated 3.1% in 2023, is projected to slow to 2.9% in 2024 and then increase to 3.0% in 2025.

Government spending needs to focus more on investment in the areas that drive sustainable growth. Especially human capital.  Recent OECD PISA scores show educational outcomes are falling, just as the skills needs of the future economy are rising.  Public debt levels are generally higher than before the pandemic, and in many countries at levels relative to GDP seen before only in wartime.  Governments need to adopt sustainable fiscal plans that balance intergenerational needs and prepare economies for the future.