While a wane in the Covid-19 pandemic earlier this year gave the global economy a temporary boost, the Organization for Economic Cooperation and Development (OECD)’s economic outlook sees a slowdown continuing into the coming year.
The OECD recently released its global economic outlook, which found that the world economy is slowing more than anticipated and 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 is projected to be at least $2.8 trillion lower in 2023 compared to December 2021 forecasts.
One of the biggest factors contributing to this decline is the continuing war in Ukraine, which has put additional pressure on prices in multiple sectors, including food and energy. On top of that, generalized tightening of monetary policy, driven by greater-than-expected overshoot of inflation targets, has also slowed growth.
Continued shutdowns in China due to the country’s zero-Covid policy have impacted not only its economy, but the global economy, as well. China’s growth slowed to just 3.2 percent in 2022.
The United States lagged even further behind in real GDP growth projections for 2022 at 1.5 percent, which is anticipated to slow to just 0.5 percent in 2023. Saudi Arabia leads year-over-year growth projections at 9.9 percent in 2022, but is still projected to see that growth decline to 6 percent next year.
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And while broader inflationary pressures have been seen in the U.S. for much of 2022, areas like Europe and to a lesser degree, Japan, are starting to feel the pinch. More than half of the items in the price index show inflation above 4 percent in the United Kingdom, the U.S. and the Euro area, reflecting a sharp increase compared to a year before and more than doubling their targets.
With unemployment rates at or close to 20-year low in many countries, tight labor market conditions have boosted wages—particularly in the U.S., U.K., and Canada—Band helped mitigate the loss of purchasing power and growth. But OECD said this labor market also is contributing to broad-based inflation.
OECD predicts inflation will peak in the current quarter in most major economies and decline in the fourth quarter and in 2023 in most G20 countries. That said, the organization expects inflation will remain well above central bank targets around the globe in 2023.
While the U.S. is expected to see more progress in inflation reduction due to early monetary policy tightening, the U.K. and Euro zone will lag behind with elevated headline and core inflation over the coming year. Looking elsewhere, China has enjoyed low and stable inflation while Brazil and Mexico are expected to see inflation relief as they raise interest rates. Countries such as Turkey and Argentina are expected to continue to see high inflation rates in 2023, though levels should be slightly lower than in 2022.
Energy source disruption also plays a major role in OECD’s economic outlook. As the war in Ukraine continues, supplies from Russia and the European Union continue to see major disruption. And unless countries make a significant effort to reduce consumption, the situation could get exponentially worse.
Gas storage levels in the European Union have been raised to almost 90 percent of capacity, but even at this level, OECD said there may not be sufficient gas storage to ensure that demand in a typical winter can be met without depleting storage to dangerously low levels if the European Union fails to reduce gas consumption. Shortfalls could increase significantly if additional non-Russian supplies from outside the European Union fail to materialize or if a particularly cold winter increases demand.
OECD said that without energy supply diversification and demand reduction, shortages could boost global energy prices, require temporary rationing and negatively impact confidence and financial conditions. These impacts could reduce European economy growth by more than 1.25 percentage points in 2023 and raise inflation by more than 1.5 percentage points. This increase would push many European countries in to recession in 2023. And worldwide, inflation could be pushed up by more than a half a percentage point in 2023 with growth reduced by just under a half a percentage point.
With lingering issues from the COVID-19 pandemic, the ongoing disruptions of the war in Ukraine and record inflation contributing to a stagnated global GDP in the second quarter and output decline, OECD said the global economic outlook remains difficult for the foreseeable future.