On Monday 26th September, the Organisation for Economic Cooperation and Development (OECD) released their forecasts for the global economy. The outlook is bleak. International output growth is projected to grow at a rate of 2.2% over 2023, down from initial projections of 2.8% growth for 2023. This contrasts negatively to a growth rate of 3% in 2022 and represents an even greater fall from 6% growth in 2021. The Russian invasion of Ukraine, the ongoing effects of China’s Zero Covid Policy, as well as an increase in interest rates by the ECB, Federal Reserve, and Bank of England, have been identified as the main causes of this sluggish economic activity. The OECD identifies the Russian invasion of Ukraine as a key contributor to these negative forecasts – with forecasts outlining a $2.8 trillion decrease in global GDP thanks to the invasion. It also notes that the economic impact of the War is greater than previous forecasts predicted.
As a result, ECB policy has transitioned away from negative interest rates. This tightening of monetary policy has led to a decrease in the money supply, alleviating pressure on prices. This has also been cited as a primary contributor for slower economic growth over the next calendar year.
The OECD predicts that because the US Fed started contractionary monetary policy earlier, their high inflation levels will decline more swiftly than those of Europe and the UK.
The OECD also notes the impact of reduced energy supplies from Russia to the EU. Gas storage levels have recently been recorded at 90% of capacity in the EU. However, projections indicate that this initiative will not be sufficient on its own to assist households through the Winter. A serious reconsideration of energy usage in Europe is pivotal and new European policy must acknowledge the necessity of reducing gas consumption. The OECD projects that European growth could fall by a further 1.25% points relative to their initial forecasts for 2023 if supply is not better diversified and gas consumption reduced. This, together with increasing inflation, would plunge several European economies into recession in 2023 if European leaders do not properly confront the energy crisis.
Although slow and laborious growth is predicted for the Eurozone, a recession is unavoidable if gas consumption cannot be reduced or if problems arise with other energy suppliers to the European countries. The outlook for the UK looks even more bleak with the OECD projecting zero growth. Germany’s dependence on Russian energy supplies has seen the OECD project a contraction in its economy for 2023. The outlook looks bleak indeed.