Russia’s invasion of Ukraine, rising energy costs and record-breaking inflation have thrown the global economy into disarray, triggering a “prolonged period of subdued growth,” according to the Organization for Economic Co-operation and Development (OECD) latest forecast.
Germany, the EU’s industrial powerhouse, is expected to slide into recession next year.
“Global growth prospects have clouded over,” the OECD said in a report entitled “Paying the price of war.”
The study paints a bleak picture of the global economy: business confidence, disposable income and household spending are falling while fuel, food and transport costs are soaring.
Inflation is now ‘broad-based’ and will gradually ease over the course of 2023, but still remains exceptionally high as tighter financial conditions resulting from sharp interest rate hikes are beginning to deliver results.
For Europe, in the event of a colder-than-usual winter, the prognosis is particularly grim: underground gas storage would be exhausted and energy prices would soar, leading to shortages and industrial paralysis.
“This would push many countries into a year-round recession in 2023,” says the OECD in the event of winter disruptions and forced gas cuts.
The organization also warns of the possibility that sanctions on Russian oil, one of Moscow’s main sources of revenue, could prove “more destructive than expected”.
The EU-wide embargo will come into force at the end of the year and will take about two million barrels per day of Russian crude and refined products off the market.
Unless Russia can redirect these supplies to other regions, international prices will skyrocket, putting even more pressure on already volatile energy supply chains.
“The global economy has lost momentum this year,” the report notes. “With the COVID-19 pandemic making a strong recovery, a return to a more normal economic situation seemed on the cards ahead of Russia’s unprovoked, unjustifiable and illegal war of aggression against Ukraine.”
Russia and Germany are heading towards a recession
Of all the countries analyzed in the report, Russia is by far the hardest hit: hit by unprecedented Western sanctions, the country is forecast to shrink by 5.5% in 2022 and 4.5% in 2023.
Meanwhile, Germany will end this year with a positive expansion of 1.2% but will decline by 0.7% next year. Recession fears are spreading in the country, which was a big consumer of Russian gas until earlier this year and is now scrambling to find alternative suppliers.
“The signs of a recession for the German economy are increasing,” said the Bundesbank last week.
The other European economies included in the OECD study perform somewhat better. France, Italy and Spain will see modest growth rates of 0.6%, 0.4% and 1.5% respectively in 2023.
The eurozone will expand by 3.1% in 2022 and a meager 0.3% in 2023. Inflation will average 6.2% next year, more than triple the European Central Bank’s target of 2%.
These pessimistic views could worsen as the energy crisis deepens.
“Significant uncertainty surrounds the forecasts. Greater fuel shortages, especially for gas, could reduce growth in Europe by a further 1.25 percentage points in 2023,” the OECD warns.
Across the bloc, the United States will grow 0.5% over the next year, while the UK will register a 0% rate, meaning it will neither expand nor contract.
Japan, Canada, Argentina, Brazil, South Africa and Mexico will all see limited rates below the 2% mark.
China, a motor of the global economy that has a strict zero-Covid policy, will grow 3.2% in 2022 and then accelerate to 4.7% in 2023.
On the other hand, Saudi Arabia seems to be experiencing an economic boom, “buoyed by high energy prices”. The oil-rich country is estimated to expand by nearly 10% this year and 6% next year.
Overall, the global economy will grow by 3% in 2022 and by 2.2% in 2023.
