OECD global economic imbalance deepening ‘Debts of aging countries will worsen next year’ Lee Chang-yong ‘postpones interest rate cut’
The Organization for Economic Co-operation and Development (OECD) pointed out 'increasing debt' as a risk in aging countries as the pace of imbalance worsens in the world economic report, the economy will cool next year and expenditure curbs begin, and Korea became the main target, and Bank of Korea Governor Lee Chang-yong said that day. In the United States, an emergency press conference was held to announce the postponement of interest rate cuts.
“The economy will begin to cool next year, slowing to 1.8% growth, and businesses and households will adapt to high borrowing costs and begin to curb spending,” the OECD Secretary-General said at a press conference announcing the report in Paris on the 2nd. “Especially with the population, “It will worsen further in countries that will soon face additional spending pressure due to aging,” making Korea the target country for the worsening situation.
Secretary-General Mathias Cormann said on the day, “This could create new financial vulnerabilities in emerging countries, which may have to roll over large amounts of debt maturing within the next three years at higher costs.” “We expect the problem to worsen as governments better manage global debt growth, particularly in countries that will soon face additional spending pressures from aging populations.”
The OECD report specifically states that “fiscal policies must address growing pressures to ensure debt sustainability” and that “government debt-to-GDP ratios are expected to increase further in many countries. Governments face fiscal challenges due to rising debt servicing costs, significant additional spending pressures due to aging populations, and the need to finance climate change mitigation and adaptation, national defense, and new reforms. Without action, future debt burdens are likely to increase. “It will increase significantly,” he said.
Regarding the fiscal cut policy, the report said, “There is a need to strengthen short-term efforts to curb spending growth, reform to increase revenue, and early establish credible mid-term spending and tax plans tailored to each country’s development.”
The OECD report published on the website specifically pointed out ‘fiscal pressure,’ ‘increasing government debt,’ and ‘deterioration of public finances due to rising interest rates.’
Regarding the worsening government debt, the report said, “By the end of 2025, OECD general government total debt is expected to be 117% of GDP, about 42 percentage points higher than before the global financial crisis. “Higher debt and rising interest rates will result in further increases in government debt servicing costs as debt previously issued at low interest rates matures and is replaced by new, higher yielding issues.”
“Fiscal pressures are expected to increase in the coming years,” the report said of the worsening finances. “In the absence of offsetting fiscal policy adjustments, the net government debt-to-GDP ratio of the G7 median country could rise by 70 percentage points by 2040,” he said. “Without policy changes, aging populations will lead to significant economic and health problems in many developed countries.” “Public spending on care will increase significantly, accounting for around one-third of the projected increase in debt-to-GDP ratio by 2040.”
Government debt, in particular, “continued structural fiscal deficits and higher-than-past past refinancing costs are other major sources of debt pressure in the future,” he said. “In many countries, planned increases in defense spending and climate change mitigation and adaptation measures are part of efforts to build fiscal buffers.” He pointed to the increase in restructuring costs and the military expansion policy as “going to make things more complicated.”
“We have experienced the inflationary shock of a generation,” lead economist Clare Lombardelli, the report's author, said at a briefing. “The biggest price increases are for essential items such as food and energy, with low-income people in particular being squeezed. “He said.
The OECD predicted China's growth rate to ‘slow gently’ from 4.9% this year to 4.5% next year.
“In China, a boom in exports from solar panels to electric vehicles has revitalized the manufacturing sector and is helping offset a deep slump in the housing market, which accounts for about a quarter of the economy,” the OECD’s economic assessment of China said. “The rapidly unfolding real estate crisis is eating away at the wealth of millions of Chinese people and is not bottoming out, and the Chinese government is deploying stimulus spending accordingly,” the New York Times said.
Regarding the European economic diagnosis, “Europe is relatively lagging behind, with manufacturing shrinking due to soaring energy prices and consumers refraining from spending due to the cost of living crisis,” he said. “Both the euro currency bloc and the UK are working with the European Central Bank (ECB) to combat inflation.” Due to the record high interest rates implemented by the Bank of England, 2023 ended in recession, and the UK's growth rate slumped to 0.4% in 2024, but as interest rates remain high, it will improve to 1% in 2025, making it the most vulnerable economy among G7 countries. “The report said.
In Europe, Germany was hit particularly hard by the energy shock, but the recession in the euro zone was somewhat offset by strong growth in Southern European countries such as Greece and Spain, and next year, 'when high interest rates fall', corporate and household spending will increase. With the improvement, the Eurozone economy is expected to grow by 1.5% in 2025.
Regarding interest rates, the report said, “Monetary policy must be cautious to ensure that fundamental inflationary pressures are continuously suppressed,” and “If inflation continues to ease, there is room to lower the nominal policy interest rate, but the policy stance will remain restrictive for the time being. “It was revealed.
Regarding the prospect of interest rate cuts, he said, “The speed and scale of policy rate cuts will vary depending on the data and vary from country to country depending on economic conditions.” He stated that he will pay attention to service prices as “an important factor is the reduction in price pressure.”
In terms of interest rate cut forecasts, the report predicts that “the federal funds rate will be lowered from the third quarter of 2024 in the United States to 33/4-4% by the end of 2025, when inflation is expected to be 2%,” and “Euro Area 2024 “The deposit interest rate is expected to ease to 2.5% starting from the third quarter of 2025 until the end of 2025.”
Regarding interest rates in Korea and Japan, the report said, “In Japan, as core inflation has stabilized at about 2% and a positive output gap has formed, the policy interest rate will gradually increase to 0.75% by the end of 2025,” and “the policy interest rate will be cut in Australia from the second half of 2024.” , is expected to start in Canada, Korea, and the United Kingdom,” and “central bank bond holdings are expected to decrease further in all countries except Korea,” pointing out Korea as an exception.
On the day the report was released, Bank of Korea Governor Lee Chang-yong held an emergency press conference in the United States, saying, “The situation has changed since April, making it difficult for the April monetary policy direction to be the basis for the May monetary policy direction,” adding, “As of April, the U.S. was pivoting.” Since the signal was given, monetary policy was established on the premise that the United States would begin lowering interest rates in the second half of the year. “In the meantime, as the economic data in the U.S. has been improving, the point at which interest rates are expected to be lowered seems to have begun to be pushed back,” he said, revising the ‘interest rate cut in May’ announcement.
Regarding the reasons for the change, Governor Lee explained, “Three premises have changed: the situation in the United States, Korea’s surprising growth, and the volatility of the won-dollar exchange rate due to geopolitical tensions.”
Governor Lee continued, “We should not take for granted that the growth rate is decreasing due to aging, but we should think that it can be increased through restructuring,” and announced restructuring of aging through financial injection.