The world economy is set to enjoy growth of almost 4 per cent both this year and next while unemployment across the advanced nations will drop to its lowest level since 1980, new projections by the OECD show.

The OECD’s outlook is consistent with the Australian budget forecasts, predicting that the Australian economy will achieve growth of 2.9 per cent this calendar year rising to 3 per cent in 2019.

The OECD expects that the economy’s growth will be sufficient to justify the Reserve Bank beginning to lift interest rates by the end of this year.

The OECD’s review of the global outlook cautions that much of the revival in growth is being achieved by countries easing their budget constraints, with the US tax cuts and spending stimulus the most obvious example.

“Fiscal policy is the new game in town: three quarters of OECD countries are now undertaking fiscal easing. The fiscal stimulus in some countries is very significant, while it is less ambitious in other countries,” OECD chief economist Alvaro Pereira said.

He said that in the short term, the easing of budgets would add to growth but said inflationary pressure would rise in countries where the economies have already been expanding for some years.

“Only time will tell if these short-run gains might be offset by some medium-term pain,” he said.

Mr Pereira said the stronger tempo in the economies of the advanced countries was bringing rapid growth in employment.

“Thanks to this robust job creation and the related intensifying labour shortages, we are now projecting a rise in real wages in many countries,” he said.

It said wages and prices would start lifting in Australia by the end of the year, helped by continuing strong employment growth, bringing the jobless rate down to 5.3 per cent next year.

“The resulting boost to household incomes should mitigate risks associated with Australia’s very high household indebtedness,” it said. Risks from the housing market would require continued vigilance, it said.

It predicts that the underlying rate of inflation will still be only 1.9 per cent by the end of this year, but will rise to 2.2 per cent over 2019.

Scott Morrison welcomed the OECD report saying it recognised that the Australian economy was strengthening.

“As well as confirming our budget growth forecasts, it also backs the assessment of the Reserve Bank that our record jobs growth is boosting wages and household spending,” the Treasurer said.

The OECD said the government’s budget position was “sound” and said there was scope to use budget spending to support the economy in the event of a downturn.

Mr Pereira said that despite the good news on the global economy, the risks “loom large”. He highlighted the escalation of trade tensions.

“Since the world economy is much more integrated and linked today than in the past, a further escalation of trade tensions might significantly affect the economic expansion and disrupt vital global value chains. “

Mr Pereira also drew attention to the 50 per cent rise in oil prices over the past year, which he said would increase trade imbalances and generate inflationary pressure.

He said rising interest rates would expose the nations, corporations and individuals that had borrowed too heavily during the long period of extremely low rates.

“If inflation rises more than expected and central banks are forced to raise rates at a faster pace, it is likely that market sentiment could shift abruptly, leading to a sudden correction in asset prices,” he said.

• The Australian
• 7:42PM May 30, 2018