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The OECD has cut its economic forecasts for the coming year even further than two months ago. The reevaluation of the forecast is especially deep in Europe due to the impact of the energy crisis aggravated by the Russian invasion of Ukraine and considers that the number one priority for governments and central banks should be inflation.
In its outlook report released on Tuesday, the Organisation for Economic Co-operation and Development (OECD) estimates that world gross domestic product (GDP) growth is set to slow seriously from 3.1% this year to 2.2% next year.
Moreover, recovery from what is described as “the biggest energy crisis since the 1970s” will be slow in coming, as growth will only rise to a modest 2.7% in 2024.
Except for Ireland, which has been revised upwards to 3.8 %, and Japan, which remains at 1.8 %, the authors of the report have cut the forecasts for the other 36 countries of the organization compared to the previous half-yearly report published in June.
GDP decline in six OECD members in 2023
Although recessionary situations will not be widespread, six of these countries will see their GDP decline in 2023, in particular, due to the impact of the war in Ukraine: Germany (-0.3 %), the UK (-0.4 %), Chile (-0.5 %), Sweden (-0.6 %), Finland (-0.3 %) and Latvia (-0.2 %).
The GDP of the eurozone as a whole will only increase by 0.5% (1.6% was expected in June) and the same will be true for the US (1.2% was anticipated). The recovery in both cases will be very timid in 2024, with an increase of 1.4% and 1%, respectively.
This is regardless of the fact that the main risk surrounding these projections is that of a worsening of the energy crisis, especially in Europe this winter, and perhaps even more so next winter because of the difficulties in filling gas reserves.
Because, as the OECD warns, even higher gas prices or a supply disruption would cut economic growth and raise inflation.
In the major emerging economies, although the general trend is also for a slowdown in 2023, the situation is quite disparate, and a good example is China, which this year will have a limited increase in GDP (3.3%) due to the constraints of its zero covid policy, and where a recovery is anticipated in 2023 (4.6%) that should be maintained in 2024 (4.1%).
Sanctions against Russia have little impact for now
The OECD implicitly acknowledges that Western sanctions against Russia over the war are so far having nowhere near the impact it had initially predicted.
Although it estimates that its economy will suffer a recession of 3.9% this year, in June it estimated that the downturn would be 10%. The authors of the study state that the situation there will get much worse next year, with a 5.6% drop, and the decline in GDP will continue in 2024 (-0.2%).
The OECD’s chief economist, Alvaro Santos Pereira, insists that the fight against inflation “must now be our first priority, and this involves the interest rate hikes being implemented by central banks, which are already having an effect.”
According to his projections, this rise will have to continue during the remainder of 2022 and the first half of 2023 to reach a rate above 4% for the European Central Bank and 5% for the US Federal Reserve.
But monetary policy is not enough. Governments must also get involved with a more restrictive fiscal policy aimed at saving energy and promoting renewables.
In particular, public aid to offset the energy costs of individuals and companies cannot continue to be massive and indiscriminate, but rather temporary and selective, so as to protect the most vulnerable without generating additional inflationary pressures.
He also stresses that governments must keep markets open and trade flows unimpeded because continuing with protectionist policies would be “a serious setback for many countries, particularly the world’s poorest, and would significantly harm the global economy.”