PARIS- The global economy should avoid a recession next year but the worst energy crisis since the 1970s will trigger a sharp slowdown, with Europe hit hardest, the OECD said, adding that fighting inflation should be policymakers’ top priority.
National outlooks vary widely, although Britain’s economy is set to lag major peers, the Organization for Economic Cooperation and Development said on Tuesday.
It forecast that world economic growth would slow from 3.1 percent this year – slightly more than the OECD foresaw in its September projections – to 2.2 percent next year, before accelerating to 2.7 percent in 2024.
“We are not predicting a recession, but we are certainly projecting a period of pronounced weakness, OECD head Mathias Cormann told a news conference to present the organization’s latest Economic Outlook.
The OECD said the global slowdown was hitting economies unevenly, with Europe bearing the brunt as Russia’s war in Ukraine hits business activity and drives an energy price spike.
It forecast that the 19-country euro zone economy would grow 3.3 percent this year then slow to 0.5 percent in 2023 before recovering to expand by 1.4 percent in 2024. That was slightly better than in the OECD’s September outlook, when it estimated 3.1 percent growth this year and 0.3 percent in 2023.
The OECD predicted a contraction of 0.3 percent next year in regional heavyweight Germany, whose industry-driven economy is highly dependent on Russian energy exports – less dire than the 0.7 percent slump expected in September.
Even in Europe outlooks diverged, with the French economy, which is far less dependent on Russian gas and oil, expected to grow 0.6 percent next year. Italy was seen eking out 0.2 percent growth, which means several quarterly contractions are probable.
Outside the euro zone, the British economy was seen shrinking 0.4 percent next year as it contends with rising interest rates, surging inflation and weak confidence. Previously the OECD had expected 0.2 percent growth.
The US economy was set to hold up better, with growth expected to slow from 1.8 percent this year to 0.5 percent in 2023 before rising to 1.0 percent in 2024. The OECD had previously expected growth of only 1.5 percent this year in the world’s biggest economy and its estimate for 2023 was unchanged.
China, which is not an OECD member, was one of the few major economies expected to see growth pick up next year, after a wave of COVID lockdowns. Growth there was seen rising from 3.3 percent this year to 4.6 percent in 2023 and 4.1 percent in 2024, compared with previous forecasts of 3.2 percent in 2022 and 4.7 percent for 2023.
As tighter monetary policy takes effect and energy price pressures ease, inflation across OECD countries was seen falling from more than 9 percent this year to 5.1 percent by 2024.
“On monetary policy, further tightening is needed in most advanced economies and in many emerging market economies to firmly anchor inflation expectations,” Cormann said.
While many governments had already spent heavily to ease the pain of high inflation with energy price caps, tax cuts and subsidies, the OECD said the high cost meant such support would have to be better targeted going forward.
The downturn in the euro zone economy has deepened as high inflation and fears of an intensifying energy crisis hit demand, adding to evidence the bloc is heading for a winter recession.
A closely-watched survey showed euro zone October business activity contracted at the fastest pace since late 2020. German industrial orders also slumped more than expected in September as foreign demand sank, putting Europe’s largest economy on course for recession.
S&P Global’s final composite Purchasing Managers’ Index (PMI) for the euro zone, seen as a good guide to economic health, fell to a 23-month low of 47.3 in October from September’s 48.1, albeit just above a preliminary 47.1 estimate.
Anything below 50 indicates contraction.
Asked what type of recession the euro zone would endure, 22 of 46 respondents in an October Reuters poll said it would be short and shallow while 15 said it would be long and shallow. Eight said it would be short and deep and only one said it would be long and deep.
In France, the bloc’s second biggest economy, earlier data showed industrial output declined in September although its PMI indicated services sector growth slowed less than initially forecast in October.
Spanish services sector activity contracted for the second straight month in October, weighed down by high inflation again, its PMI showed.
Inflation in the 19 countries using the euro currency surged more than expected last month, reaching 10.7 percent and more than five times the European Central Bank’s target. Consequently, the ECB is likely to press ahead with more interest rate rises, which will add to the burden faced by indebted consumers.
The ECB was the last among its peers to begin raising rates in this cycle, waiting until July. By year-end the deposit and refinancing rates were forecast to be at 2.00 percent and 2.50 percent respectively.
