While a lull in the Covid-19 pandemic earlier this year gave the global economy a temporary boost, the Organization for Economic Co-operation and Development (OECD) economic outlook sees a slowdown into next year.
The OECD recently released its Global Economic Outlook, which found that the global economy is slowing more than expected and is expected to remain subdued through the end of the year. Annual growth for 2023 is expected to be just 2.2 percent, and global GDP in 2023 is expected to be at least $2.8 trillion lower than projected in December 2021.
One of the biggest factors contributing to this decline is the ongoing war in Ukraine, which has put additional pressure on prices in several sectors, including food and energy. In addition, overall monetary tightening, fueled by higher-than-expected inflation overshoots, has also weighed on growth.
Continued closures in China due to the country’s zero-Covid policy have impacted not only its economy but also the global economy. China’s growth slowed to just 3.2 percent in 2022.
The United States lagged even further behind forecasts for real GDP growth in 2022 at 1.5 percent, which is expected to slow to just 0.5 percent in 2023. Saudi Arabia leads the year-on-year growth forecasts at 9.9 percent in 2022, but is still forecast to see growth slow to 6 percent next year.
And while the US saw broader inflationary pressures for much of 2022, regions like Europe and to a lesser extent Japan are beginning to feel the pinch. More than half of the items in the price index show inflation above 4 per cent in the UK, US and eurozone, reflecting a sharp year-on-year increase and more than doubling their targets.
With unemployment rates at or near 20-year lows in many countries, tight labor market conditions have pushed up wages – particularly in the US, UK and Canada – and helped moderate falling purchasing power and growth. But the OECD said this labor market also contributes to broad-based inflation.
The OECD forecasts that inflation will peak in most major economies in the current quarter and decline in most G20 countries in the fourth quarter and in 2023. However, the organization expects global inflation in 2023 to be well above central bank targets.
While further progress in reducing inflation is expected in the US due to early monetary tightening, the UK and the Eurozone will lag behind with elevated headline and core inflation in the coming year. Looking at other countries, China enjoys low and stable inflation, while Brazil and Mexico are expected to see inflation fall as they raise interest rates. Countries like Turkey and Argentina are expected to remain high in inflation rates in 2023, albeit slightly lower than in 2022.
The disruption of energy sources also plays an important role in the economic outlook of the OECD. Significant disruptions to supplies from Russia and the European Union continue as the war in Ukraine continues. And unless countries make significant efforts to reduce consumption, the situation could worsen exponentially.
Gas storage levels in the European Union have been raised to almost 90 percent of capacity, but even at this level there may not be enough gas storage to ensure demand can be met in a typical winter without reducing storage to dangerously low levels, according to the OECD level to be exhausted if the European Union does not reduce gas consumption. The shortages could increase significantly if additional non-Russian supplies from outside the European Union fail to materialize or if a particularly cold winter increases demand.
The OECD said that without diversifying energy supplies and reducing demand, shortages could push up global energy prices, require temporary rationing and negatively affect confidence and financial conditions. This impact could reduce European economic growth by more than 1.25 percentage points in 2023 and increase inflation by more than 1.5 percentage points. This increase would push many European countries into recession in 2023. And globally, inflation could be pushed up by more than half a percentage point in 2023 while growth is cut by almost half a percentage point.
With ongoing concerns from the COVID-19 pandemic, ongoing disruptions from the war in Ukraine and record inflation contributing to flat second-quarter global GDP and contracting output, the global economic outlook remains challenging for the foreseeable future, according to the OECD.
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