The Organisation for Economic Co-operation and Development (OECD) has announced that the global economy is expected to slow down significantly due to rising interest rates.
Global economy poised to slow as rate hikes bite, OECD says
The Organization for Economic Co-operation and Development (OECD) has issued a stark warning, projecting a slowdown in global economic growth driven by continued interest rate increases and a weakening rebound in China. The organization’s latest forecasts indicate a deceleration to 2.7 per cent in 2024, following an already subdued expansion of 3 per cent this year – a figure that represents the weakest annual growth since the global financial crisis of 2008, with the exception of 2020 when the COVID-19 pandemic profoundly impacted economic activity worldwide. This projection underscores the considerable challenges confronting central banks as they navigate the delicate balance between combating stubbornly persistent inflation and avoiding a deeper economic downturn.
Persistent Inflation and Monetary Tightening
The OECD’s forecast is predicated on the continued effects of interest rate hikes implemented by central banks globally. These measures, intended to curb inflation, are now beginning to weigh heavily on economic activity. While headline inflation rates have begun to decline, core price gains—gauges of inflation excluding volatile food and energy prices—remain a significant concern. This suggests that underlying inflationary pressures may prove to be more persistent than initially anticipated, potentially necessitating further monetary tightening. The organization cautions that “monetary policy needs to remain restrictive until there are clear signs that underlying inflation pressures have durably abated.”
China’s Economic Struggles as a Key Risk
A particularly significant risk highlighted by the OECD is the weakness in China’s economic performance. After a stronger-than-expected start to 2023, bolstered by lower energy prices and the reopening of its economy following the initial stages of the COVID-19 pandemic, global growth is expected to moderate. The OECD estimates that China’s output will rise by less than five per cent in 2024, largely due to subdued domestic demand and structural stresses within its property markets. This slowdown has broad implications for the global economy, as China has long been a primary driver of growth and a major source of demand for commodities and manufactured goods. The organization notes that the scope for effective policy support in China may also be more limited than in the past, further amplifying the risks to global growth.
Regional Variations and Downward Adjustments
The OECD’s outlook is not uniform across all regions. The organization has significantly downgraded growth forecasts for the euro area, predicting a contraction of 0.2 per cent in Germany for 2023—making it the only G20 nation, aside from Argentina, to experience a downturn. The United States is forecast to maintain a stronger growth rate than previously anticipated, increasing from 2.2 per cent in 2023 to 1.3 per cent in 2024. However, Germany’s situation reflects broader concerns about the health of the European economy, characterized by high energy costs, rising interest rates, and persistent inflation.
External Shocks and Volatile Oil Prices
Several external factors are contributing to the uncertain economic environment. A sharp rise in oil prices, exceeding 25 per cent since May, has fueled inflation in many countries, particularly those that are net importers of fossil fuels. The organization’s chief economist, Clare Lombardelli, emphasized the unwelcome nature of these developments, stating that “Oil prices will continue to be potentially volatile through this period.” The volatility of oil prices presents a significant source of risk, as it can significantly impact household budgets and overall demand.
Caution Against Excessive Government Intervention
The OECD urges policymakers to proceed cautiously, advocating for a scaling back of government spending to avoid further fueling inflation and creating distortions in the economy. Rather than implementing additional stimulus measures, the organization stresses the need for monetary policy to remain restrictive until there are durable signs of abating inflationary pressures. This approach is intended to create room for future investment and avoid exacerbating the challenges posed by persistent inflation. The organization’s message represents a deliberate attempt to avoid the pitfalls of past stimulus policies.
