Interest rates

Interest rates and inflation fuel ‘very, very difficult’ global economic outlook: OECD – National

Hindered by the high interest ratepunish inflation and Russia war against Ukraine, the global economy is expected to show only modest growth this year and develop even more timidly in 2023.

That was the sobering forecast released Tuesday by the Paris-based Organization for Economic Co-operation and Development. In the from the OECD The global economy is estimated to grow just 3.1% this year, down sharply from the solid 5.9% recorded in 2021.

Next year, according to the OECD, it will be even worse: the international economy will grow by only 2.2%.

“It is true that we do not foresee a global recession,” OECD Secretary-General Mathias Cormann told a news conference. “But it’s a very, very difficult prospect, and I don’t think anyone will take much comfort from the 2.2% global growth projection.”

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The OECD, made up of 38 member countries, works to promote international trade and prosperity and publishes periodic reports and analyses. Figures from the organization show that 18% of member countries’ economic output is spent on energy after Russia’s invasion of Ukraine helped drive up oil and natural gas prices. This has confronted the world with an energy crisis on the scale of the two historic energy price spikes of the 1970s, which also slowed growth and stoked inflation.

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Inflation – largely fueled by high energy prices – “has become widespread and persistent”, Cormann said, while “real household incomes in many countries have weakened despite the support measures that many governments have deployed”.

In its latest forecast, the OECD predicts that the US Federal Reserve’s aggressive drive to control inflation with higher interest rates – it has raised its benchmark rate six times this year, in substantial increases – will tie up the American economy. He expects the United States, the world’s largest economy, to grow just 1.8% this year (down drastically from 5.9% in 2021), 0.5% in 2023 and 1% in 2024.

This grim perspective is widely shared. Most economists expect the United States to enter at least a mild recession next year, although the OECD has not specifically forecast one.

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The report projects that US inflation, although decelerating, will remain well above the Fed’s 2% annual target next year and into 2024.

The OECD forecasts for the 19 European countries sharing the euro, which are suffering an energy crisis due to the war in Russia, are hardly more optimistic. The organization expects the eurozone to collectively manage just 0.5% growth next year before accelerating slightly to 1.4% in 2024.

And he expects inflation to continue to grip the continent: the OECD predicts that consumer prices, which rose just 2.6% in 2021, will jump 8.3% for the 2022 as a whole and 6.8% in 2023.

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Whatever growth the international economy produces next year, according to the OECD, will largely come from emerging Asia:

Together, he estimates, they will account for three-quarters of global growth next year as the US and European economies falter. The Indian economy, for example, is expected to grow 6.6% this year and 5.7% next year.

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China’s economy, which not long ago was posting double-digit annual growth, will grow only 3.3% this year and 4.6% in 2023. The world’s second-largest economy has been hampered by the weakness in its property markets, high debts and draconian zero-COVID policy measures that have disrupted trade.

Fueled by huge government spending and record borrowing rates, the global economy has emerged from the pandemic recession of early 2020. The recovery has been so strong that it has overwhelmed factories, ports and train stations in goods, causing shortages and rising prices. Moscow’s invasion of Ukraine in February disrupted energy and food trade and further accelerated prices.

After decades of low prices and extremely low interest rates, the consequences of chronically high inflation and interest rates are unpredictable.

“Financial strategies put in place during the long period of hyper-low interest rates may be exposed to rapidly rising rates and exert stress in unexpected ways,” the OECD said in its Tuesday report.

Higher interest rates put in place by the Fed and other central banks will make it difficult for heavily indebted governments, businesses and consumers to pay their bills. In particular, a stronger US dollar, resulting in part from rising US rates, will jeopardize foreign companies that have borrowed in US currency and may not be able to afford to repay their now more expensive debt.

© 2022 The Canadian Press