Energy, inflation crises risk pushing big economies into recession: OECD

The OECD projected eurozone economic growth would slow from 3.1 per cent this year to only 0.3 per cent in 2023, which implies the 19-nation shared currency bloc would spend at least part of the year in a recession, defined as two straight quarters of contraction.

That marked a dramatic downgrade from the OECD’s last economic outlook in June, when it had forecast the eurozone’s economy would grow 1.6 per cent next year.

The OECD was particularly gloomy about Germany’s Russian-gas-dependent economy, forecasting it would contract 0.7 per cent next year, slashed from a June estimate for 1.7 per cent growth.

The OECD warned that further disruptions to energy supplies would hit growth and boost inflation, especially in Europe where they could knock activity back another 1.25 percentage points and boost inflation by 1.5 percentage points, pushing many countries into recession for the full year of 2023.

Though far less dependent on imported energy than Europe, the United States was seen skidding into a downturn as the US Federal Reserve jacks up interest rates to get a handle on inflation.

The OECD forecast that the world’s biggest economy would slow from 1.5 per cent growth this year to only 0.5 per cent next year, down from June forecasts for 2.5 per cent in 2022 and 1.2 per cent in 2023.

Meanwhile, China’s strict measures to control the spread of COVID-19 this year meant that its economy was set to grow only 3.2 per cent this year and 4.7 per cent next year, whereas the OECD had previously expected 4.4 per cent in 2022 and 4.9 per cent in 2023.

Despite the fast deteriorating outlook for major economies, the OECD said further rate hikes were needed to fight inflation, forecasting most major central banks’ policy rates would top 4 per cent next year.

With many governments increasing support packages to help households and businesses cope with high inflation, the OECD said such measures should target those most in need and be temporary to keep down their cost and not further burden high post-COVID debts.