Given high interest rates, the punishment for inflation, and Russia’s war against Ukraine, the global economy is expected to grow only modestly this year and expand even more weakly in 2023.
That was the sobering forecast published on Tuesday by the Paris-based Organization for Economic Cooperation and Development. According to OECD estimates, the global economy will only grow by 3.1 percent this year, a significant decline from a robust 5.9 percent in 2021.
Next year, according to the OECD, things would be even worse: The international economy would only grow by 2.2 percent.
“It is true that we are not predicting a global recession,” said OECD Secretary General Mathias Cormann at a press conference. “However, this is a very, very challenging outlook, and I don’t think anyone is going to be very comforted by the forecast of global growth of 2.2 percent.”
The OECD, consisting of 38 member countries, is committed to promoting international trade and prosperity and regularly publishes reports and analyses. Figures from the environmental campaign showed that a full 18 percent of economic output in member countries was spent on energy after the Russian invasion of Ukraine had helped drive up oil and natural gas prices. This has confronted the world with an energy crisis on the same scale as the two historic energy price peaks in the 1970s, which also slowed growth and boosted inflation.
Inflation, which has been reinforced primarily by high energy prices, “is broad-based and persistent,” said Cormann, while “real household incomes have weakened in many countries despite support measures introduced by many governments.”
In its latest forecast, the OECD predicts that the US Federal Reserve’s aggressive efforts to tame inflation through higher interest rates — it has raised its reference interest rate six times this year, in significant steps — will almost bring the US economy to a standstill. It expects the United States, the world’s largest economy, to grow by just 1.8 percent this year — a drastic decline of 5.9 percent in 2021, 0.5 percent in 2023 and 1 percent in 2024.
This gloomy view is widely shared. Most economists expect the US to fall into at least a slight recession next year, although the OECD has not specifically predicted any.
The report assumes that while US inflation will slow down, it will be well above the Fed’s 2 percent annual target next year and until 2024.
The OECD forecast for the 19 European countries that share the euro currency and that are going through an energy crisis as a result of the Russian war is hardly better. The organization assumes that the Eurozone will grow a total of just 0.5 percent over the next year before accelerating slightly to 1.4 percent in 2024.
And it assumes that inflation will continue to put pressure on the continent: The OECD predicts that consumer prices, which rose by only 2.6 percent in 2021, will rise by 8.3 percent for the entire year 2022 and by 6.8 percent in 2023.
Asia, a silver lining
Whatever growth the international economy will achieve next year, according to the OECD, will largely come from emerging economies in Asia: Together, it is estimated that they will account for three quarters of world growth next year, while the economies of the USA and Europe falter. India’s economy, for example, is expected to grow by 6.6 percent this year and by 5.7 percent next year.
China’s economy, which saw double-digit annual growth not too long ago, will only grow 3.3 percent this year and by 4.6 percent in 2023. The world’s second-largest economy has been hampered by the weakness of its real estate markets, high debts, and a draconian zero-COVID policy that has disrupted trade.
Driven by huge government spending and record-low credit interest rates, the global economy weathered the pandemic recession at the beginning of 2020. The recovery was so strong that it overwhelmed factories, ports, and freight yards, leading to shortages and higher prices. Moscow’s invasion of Ukraine in February disrupted energy and food trade and further accelerated prices.
After decades of low prices and extremely low interest rates, the consequences of chronically high inflation and interest rates are unpredictable.
“Financial strategies introduced during the long period of extremely low interest rates could be jeopardized by rapidly rising interest rates and cause stress in unexpected ways,” the OECD said in Tuesday’s report.
The higher interest rates set by the Fed and other central banks will make it harder for heavily indebted governments, businesses, and consumers to pay their bills. In particular, a stronger US dollar, due in part to higher US interest rates, will jeopardize foreign companies that have borrowed in the US currency and may not have the means to repay their now-more expensive debts.