Global uncertainties and labor shortages remain top risks for OECD businesses
Major OECD economies have weathered two global shocks, the pandemic and the large-scale aggression by Russian against Ukraine, reasonably well. The world economy did not suffer from a second major decline in output and employment in 2023 and inflation has substantially declined while not yet meeting central bank targets. Employment has proved more resilient than expected, and public investment has stabilized in many economies, with private investment showing divergent cyclical patterns. Global trade took a serious hit though, driven by cyclical and structural headwinds. The situation should improve slightly on all accounts this year as consumer spending should benefit from gains in real purchasing power in the wake of inflation stabilization.
In this context, the prospect of a lackluster performance of the global economy in the years ahead is clearly a matter of concern not only to citizens but to businesses as well. Moreover, the ultimate path to non-inflationary and sustainable growth that would deliver clear improvements to living standards still faces uncertainty about the effects and pathways of monetary and fiscal policies going forward. As many advanced economies enter a period of faster ageing and decreasing growth potential, reviving private sector investment to a greener and digital future should remain a top priority for policymakers. In such a challenging environment, the road to success requires more ambitious macroeconomic stabilization and structural policies promoting sustainable and equitable growth than are currently on display. It also presupposes a successful containment of international security risks by our democratic leaders.
In Business at OECD's 2024 Economic Policy Survey, which delivers the business sentiment to the OECD, at least 75 per cent identified international security concerns as the main downside risk to output and employment, up from an already prominent 60 per cent last year. The economic outlook exhibits major divergences amongst OECD countries, as 15 per cent consider a decline in activity while 58 per cent expect modest growth. This underlines a diverging outlook among OECD member economies.
In contrast to our 2023 Survey, some of the supply-side worries such as energy and food prices or financing conditions are becoming less salient issues for business. However, an alarming development is that 20 per cent of OECD business federations perceive a deterioration in competitiveness in their country, and only 10 per cent found that their countries made progress on better business regulation. Another major challenge are labor challenges and workforce skills, indicating an urgent need for further reforms in this area. There is also broad consensus among business federations that policies supporting the digital and green transitions, education, public infrastructure, and the trade and investment framework should be prioritized by policymakers.
Business federations are also concerned that the required political leadership to address these challenges and garner public support for the necessary policy reforms is still lacking. In a record year of political elections, it is time for our democratic leaders to address the underlying challenges of ageing, climate and international security in a more comprehensive and energetic fashion than in the more recent past. Fortunately, there are many recommendations from the OECD itself and from business and labor organizations on how to foster structural reforms that enhance growth and employment, revive productivity, reduce medium-term uncertainty about the investment climate and improve resilience to the next round of shocks. The key to improving the business competitiveness environment will be greater efforts to craft effective and efficient regulations.
Of course, in a globalized context, international cooperation and organizations such as the OECD are key to setting international standards and sharing best practices. Hence, the results of our Survey highlight that governments should further prioritize cooperation on international trade and security, as well as tangible solutions on migration policy and the green transition. In this unstable global environment, there is a high cost not only of wasting a crisis, but also of wasting an immediate post-crisis period for a substantial improvement on reforms. Public acceptance would come with success down the road, but the political leadership and risk-taking for the reforms required are the tasks businesses most look towards policymakers to address this year.
