The OECD has adjusted its global economic forecast for 2023, offering a mixed outlook.
While this year’s growth projection has been revised upward to 3.0%, next year’s forecast has been trimmed to 2.7% due to impactful interest rate hikes aimed at controlling inflation.
Despite the brighter start in 2023, driven by lower energy costs and China’s reopening, global growth is expected to decelerate, says the OECD.
This slowdown results from the tightening monetary policy, dwindling business and consumer confidence, and China’s fading rebound.
Central banks worldwide have significantly increased borrowing costs to combat rising consumer prices, a consequence of last year’s Russia-Ukraine conflict. OECD’s chief economist, Clare Lombardelli, acknowledged that these monetary policy measures are essential to curb inflation but acknowledged their painful impact.
The European Central Bank recently raised interest rates to a record high and hinted at pausing further hikes. Meanwhile, the US Federal Reserve is expected to take a break from its own rate hikes.
Although inflation is projected to gradually ease in 2023 and 2024, it’s expected to remain above central bank targets in most economies.
Inflation currently exceeds the Fed and ECB’s two-percent objectives, and recent data showed eurozone inflation slowing slightly to 5.2% in August.
The OECD also expressed concern about rising loan and credit card delinquency rates and corporate insolvencies in some countries due to elevated borrowing costs and tightened credit conditions.
The report warned of potential financial system stress caused by higher interest rates, pointing to the crisis at regional US banks in March and the sale of European banking giant Credit Suisse.
Another significant risk highlighted by the OECD is a sharper-than-expected slowdown in China, which could impact global output growth.
China has faced challenges in 2023 due to several years of Covid restrictions and extensive debt in the property sector. The OECD revised its outlook for China, predicting 5.1% growth this year and a drop to 4.6% in 2024.
The United States, the world’s largest economy, is expected to experience slower growth in 2024, with a decline from 2.2% in 2023 to 1.3%.
The eurozone’s growth forecast was reduced to 0.6% for 2023 and 1.1% for 2024, particularly due to struggles in the German economy.
Japan’s growth outlook showed a slight increase to 1.8% for 2023 but a slight decrease to 1.0% for 2024.