Europe to be hit hardest in global economic slowdown

The global economy should avoid a recession next year but the worst energy crisis since the 1970s will trigger a sharp slowdown, with Europe hit hardest, the OECD said, adding that fighting inflation should be policymakers’ top priority.

National outlooks vary widely, although Britain’s economy is set to lag major peers, the Organisation for Economic Cooperation and Development said on Tuesday.

It forecast that world economic growth would slow from 3.1% this year – slightly more than the OECD foresaw in its September projections – to 2.2% next year, before accelerating to 2.7% in 2024.

“We are not predicting a recession, but we are certainly projecting a period of pronounced weakness, OECD head Mathias Cormann told a news conference to present the organisation’s latest Economic Outlook.

The OECD said the global slowdown was hitting economies unevenly, with Europe bearing the brunt as Russia’s war in Ukraine hits business activity and drives an energy price spike.

It forecast that the 19-country euro zone economy would grow 3.3% this year then slow to 0.5% in 2023 before recovering to expand by 1.4% in 2024. That was slightly better than in the OECD’s September outlook, when it estimated 3.1% growth this year and 0.3% in 2023.

The OECD predicted a contraction of 0.3% next year in regional heavyweight Germany, whose industry-driven economy is highly dependent on Russian energy exports – less dire than the 0.7% slump expected in September.

Even in Europe outlooks diverged, with the French economy, which is far less dependent on Russian gas and oil, expected to grow 0.6% next year. Italy was seen eking out 0.2% growth, which means several quarterly contractions are probable.

Outside the euro zone, the British economy was seen shrinking 0.4% next year as it contends with rising interest rates, surging inflation and weak confidence. Previously the OECD had expected 0.2% growth.

The U.S. economy was set to hold up better, with growth expected to slow from 1.8% this year to 0.5% in 2023 before rising to 1.0% in 2024. The OECD had previously expected growth of only 1.5% this year in the world’s biggest economy and its estimate for 2023 was unchanged.

China, which is not an OECD member, was one of the few major economies expected to see growth pick up next year, after a wave of COVID lockdowns. Growth there was seen rising from 3.3% this year to 4.6% in 2023 and 4.1% in 2024, compared with previous forecasts of 3.2% in 2022 and 4.7% for 2023.

As tighter monetary policy takes effect and energy price pressures ease, inflation across OECD countries was seen falling from more than 9% this year to 5.1% by 2024.

“On monetary policy, further tightening is needed in most advanced economies and in many emerging market economies to firmly anchor inflation expectations,” Cormann said.

While many governments had already spent heavily to ease the pain of high inflation with energy price caps, tax cuts and subsidies, the OECD said the high cost meant such support would have to be better targeted going forward.