OECD Warns of ‘Significant’ Economic Slowdown, Persistently High Inflation
OECD Warns of ‘Significant’ Economic Slowdown, Persistently High Inflation

By Tom Ozimek

The Paris-based Organization for Economic Cooperation and Development (OECD), which includes the United States as a key member, has warned of a “significant growth slowdown” for the world economy in 2023 along with high inflation that has become broader and more persistent.

“The global economy is facing significant challenges,” the OECD said in a Nov. 22 release. “Growth has lost momentum, high inflation has broadened out across countries and products, and is proving persistent. Risks are skewed to the downside.”

The OECD, which is made up of 38 member countries, warned that energy supply shortages could push prices even higher, which comes as inflation in the United States remains close to a 40-year high.

Central banks, including the Federal Reserve, have rushed to hike interest rates in a bid to quash price pressures, but so far with limited impact on inflation while raising the risk of market turbulence and financial instability.

“Interest rates increases, necessary to curb inflation, heighten financial vulnerabilities,” the OECD warned, adding that the conflict in Ukraine has also raised the risks of food insecurity and debt distress in low income countries.

In the OECD’s estimation, the world economy will grow just 3.1 percent this year, down from 5.9 percent in 2021. Growth prospects will get worse next year, the OECD predicts, forecasting a tepid growth rate for the world economy of 2.2 percent.

Unlike many economist who predict that many of the world’s economies—including the United States—will tip into a recession, the OECD isn’t predicting an outright contraction.

“It is true we are not predicting a global recession,” OECD Secretary-General Mathias Cormann said at a news conference. “But this is a very, very challenging outlook, and I don’t think that anyone will take great comfort from the projection of 2.2 percent global growth.”

The United States is expected to fare even worse. The OECD predicts that U.S. economic growth will come in at a lackluster 1.8 percent in 2022. Next year, America’s GDP is forecast to grow by 0.5 percent, before growing at a pace of 1.0 percent in 2024.

Inflation

The OECD said inflationary pressures have intensified, with the war in Ukraine a major factor pushing up prices owing to higher energy and food commodity costs.

While the agency predicts that higher interest rates and slowing economic growth will “eventually” help bring down inflation, the OECD expects it will remain “high” through 2023.

Inflation in the 38 member states of the OECD is predicted to come in at 9.4 percent this year, falling to 6.5 percent in 2023.

U.S. inflation is forecast at 6.2 percent in 2022, before easing to 3.5 percent next year, the OECD predicts.

“As a consequence of the unexpected surge in prices, real wages are falling in many countries, slashing purchasing power,” Alvaro Santos Pereira, OECD chief economist, said in a statement.

“This is hurting people everywhere. If inflation is not contained, these problems will only become worse. Thus, fighting inflation has to be our top policy priority right now,” he added.

The OECD said that, after decades of ultra-low interest rates, the consequences of chronically high inflation and measures to quash it are unpredictable, with the uncertainty around the economic outlook “high,” and the risks having become “more acute” and skewed to the downside.

“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,’’ the OECD said in its report.

Tighter monetary policy will pose challenges for heavily indebted governments, businesses, and consumers, making it harder for them to pay their bills, the agency said.

Across a selection of eight OECD member countries, including the United States, the agency estimated that roughly half of inflation was caused by demand-driven factors like government stimulus and the other half by supply-side factors like dislocated supply chains.

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