The world economy is predicted to develop just a little this year and much more slowly in 2023 due to high-interest rates, punishing inflation, and Russia’s conflict with Ukraine.
The Organization for Economic Cooperation and Development, which has its headquarters in Paris, made this frightening prediction on Tuesday. According to the OECD, the global economy will expand by just 3.1% this year, a sharp decline from a healthy 5.9% in 2021.
The OECD predicts that next year will be even worse: the global economy will only grow by 2.2%.
At a press conference, OECD Secretary-General Mathias Cormann stated, “It is true we are not anticipating a worldwide recession. But this is a very, very difficult future, and I don’t believe anyone will find much solace in the estimate of 2.2% world growth.
The 38-member OECD publishes papers and analyses on a regular basis and seeks to advance global commerce and prosperity. Following Russia’s invasion of Ukraine, which helped raise the price of oil and natural gas, statistics from the organization indicated that fully 18% of economic production in member nations was spent on energy. Due to this, there is now a global energy crisis, comparable to the two historic energy price spikes in the 1970s, which also slowed economic growth and fueled inflation.
According to Cormann, high energy prices are a major contributor to inflation, which “has become broad-based and persistent,” while actual household incomes have declined in many nations despite the implementation of several government support programs.
The U.S. Federal Reserve’s strong efforts to contain inflation with higher interest rates—it has increased its benchmark rate six times this year, in sizable increments—will bring the U.S. economy to a virtual standstill, according to the OECD’s most recent prediction. The largest economy in the world, the United States, is predicted to grow by just 1.8% this year (a sharp decline from 5.9% in 2021), 0.5% in 2023, and 1% in 2024.
This pessimistic view is frequently held. Although the OECD did not specifically forecast one, the majority of experts believe that the United States would experience at least a moderate recession in 2023.
The analysis predicts that even while U.S. inflation is slowing down, it will continue to rise considerably beyond the Fed’s 2% annual objective until 2024.
The outlook provided by the OECD for the 19 European nations that use the euro as their common currency and are dealing with an energy crisis brought on by Russia’s war is not much better. The organization predicts that the eurozone would only have 0.5% growth overall next year before picking up somewhat to 1.4% in 2024.
And it anticipates that inflation will keep the continent under pressure: Consumer prices, which only increased 2.6% in 2021, are expected to rise 8.3% overall in 2022 and 6.8% in 2023, according to the OECD.
According to the OECD, Asia’s emerging market nations will account for a substantial portion of the global economy’s growth in 2022. It predicts that they will together contribute to three-quarters of global growth in 2023, while the U.S. and European economies contract. For example, it is predicted that the Indian economy will expand by 6.6% this year and 5.7% the following.
Previously boasting double-digit yearly growth, China’s economy will only increase, by 3.3% this year and 4.6% in 2023. The second-largest economy in the world has been hindered by weak real estate markets, high debt levels, and strict “zero COVID” policies that have interfered with business.
The world economy surged out of the pandemic recession of early 2020, thanks to massive government expenditure, and historically low borrowing rates. There were shortages and higher costs, as a result of the recovery’s overwhelming impact on manufacturing, ports, and freight yards. The invasion of Ukraine by Moscow, in February, hampered trade in food and energy and raised prices even further.
The effects of persistently rising inflation and interest rates are unpredictable after decades of low prices and ultra-low interest rates.
According to the OECD’s report released on Tuesday, “financial strategies put in place during the long period of hyper-low interest rates may be exposed by rapidly rising rates and exert stress in unexpected ways.”
For heavily indebted governments, businesses, and consumers, it will be challenging to pay their bills due to the higher interest rates being engineered by the Fed and other central banks. In particular, foreign businesses that borrowed in U.S. currency and may not have the resources to repay their now-expensive debt will be at risk from a stronger U.S. dollar, which is caused in part by higher U.S. rates.
