High rates, inflation to slow world growth
HOBBLED by high interest rates, punishing INflATION AND RUSSIA’S INVASION OF UKRAINE, THE GLOBAL ECONOMY IS EXPECTED TO EKE OUT ONLY MODEST GROWTH THIS YEAR AND EXPAND EVEN MORE TEPIDLY IN 2023.
In a forecast issued on Tuesday, the Paris-based Organization for Economic Cooperation and Development (OECD) estimated that the world economy would grow just 3.1 percent this year, down sharply from 5.9 percent in 2021. Expansion would only be 2.2 percent in 2023, it said.
Made up of 38 member countries, the organization works to promote international trade and prosperity, and issues periodic reports and analyses.
The OECD also forecasts that the Federal Reserve’s (Fed) aggressive drive to tame inflation with higher interest rates — it has raised its benchmark rate six times this year, in substantial increments — would grind the United States economy to a near-halt. It expects the world’s largest economy to grow just 1.8 percent this year, a steep drop from 5.9 percent in 2021, 0.5 percent in 2023 and 1 percent in 2024.
That grim outlook is widely shared, as most economists expect the US to enter at least a mild recession next year, though the OECD did not specifically predict one.
The OECD report foresees US inflation, though decelerating, to remain well above the Fed’s 2-percent annual target next year and into 2024.
The forecast for the 19 European countries that share the euro currency, which are enduring crippling energy shortages from the war in Ukraine, is hardly brighter. The eurozone is expected to expand just 0.5 percent next year before accelerating slightly to 1.4 percent in 2024.
The OECD also predicts that consumer prices, which rose 2.6 percent in 2021, would surge 8.3 percent for all of 2022 and 6.8 percent in 2023.
Whatever growth the international economy produces next year, the OECD says, would come largely from the emerging Asian markets. Together, it estimates, they would account for threequarters of world growth next year while the US and European economies falter. India’s economy, for instance, is expected to grow 6.6 percent this year and 5.7 percent in the next.
China’s economy, which not long ago boasted double-digit annual growth, would expand just 3.3 percent this year and 4.6 percent in 2023. The world’s second-biggest economy has been hobbled by weakness in its real estate markets, high debts and draconian zero-Covid policies that have disrupted commerce.
Fueled by vast government spending and record-low borrowing rates, the global economy soared out of the coronavirus pandemic-induced recession of early 2020. The recovery was so strong that it overwhelmed factories, ports and freight yards, causing shortages and higher prices. Moscow’s invasion of Ukraine disrupted trade in energy and food, and further accelerated prices.
After decades of low prices and ultra-low interest rates, the consequences of chronically high inflation and interest rates are unpredictable.
“Financial strategies put in place during the long period of hyperlow interest rates may be exposed by rapidly rising rates and exert stress in unexpected ways,” the OECD said in Tuesday’s report.
The higher rates being engineered by the Fed and other central banks would make it difficult for heavily indebted governments, businesses and consumers to pay their bills. In particular, a stronger dollar, arising in part from higher US rates, would imperil foreign companies that borrowed in the greenback and may lack the means to repay their now-costlier debt.