DRAGFLATION: WAR, SANCTIONS, RATE HIKES WILL CUT WORLD GROWTH

The world economy will grow by 2.2 percent next year, the 37-member Organization for Economic Cooperation and Development (OECD) predicted in an updated forecast.

The group trimmed growth forecasts for all so-called G-20 countries (the world’s richest), seeing only Indonesia growing faster than the rest, and then only modestly.

China’s economic growth will slow to 3.2 percent this year due to ongoing COVID lockdowns and its crisis in the real estate industry, but “policy support could help growth recover in 2023,” the report noted.

The U.S. economy will grow just 0.5 percent next year, the OECD predicted.

“The world, and Europe in particular, is bearing the cost of the war in Ukraine, and many economies face a difficult winter,” the OECD warned.

Western sanctions against Russia after it attacked Ukraine also have sharpened the looming economic crisis.

In addition, the world’s central banks have raised interest rates by a collective 20 points already this month, the OECD noted, which will hobble growth, but the report added that rates must be raised still more if inflation is to be reversed.

The OECD called the combination of the Ukraine war and rising interest rates a “synchronized shock” to the world’s economy.  

“Inflation has become broad-based in many economies,” the outlook said. “Further interest-rate increases are needed in most major economies to anchor inflation expectations and ensure that inflation pressures are reduced durably.”

“In Europe, many economies are likely to have at best weak growth in the second half of 2022 and the first quarter of 2023 before some improvement through the remainder of 2023,” OECD predicted. 

Germany, Italy, the U.K., and the “aggregate euro area” will see “near-term output declines, given the drag exerted by declining real incomes and the disruptions in energy markets.”

Germany, Europe’s economic and manufacturing powerhouse, will see its economy contract 0.7 percent in 2023, according to the OECD.

“EU gas storage levels have been raised considerably through the course of this year, and are now between 80 and 90 percent [of normal] on average in most member states,” the OECD found. 

However, “even at this level, there may not be sufficient storage to ensure that demand in a typical winter can be met without storage levels in the European gas market being pushed below effective operational levels,” it warned.

Any crucial fuel shortage, especially in natural gas, could whack the region’s growth rate by an additional 1.25 percentage points next year while also adding 1.5 points to inflation.

That would drive “many countries into a full-year recession in 2023” and European growth “would also be weakened in 2024,” the report said.

The OECD’s forecast assumes no new COVID waves, no further escalation of the Ukraine war, and pressures easing in energy markets—all of which leaves “significant uncertainty” around its projections, the group acknowledged. 

PUBLISHER’S NOTE: Shrinking economic output amid rising prices is the definition of Dragflation, one of our Top 2022 Trends.

As we wrote last 30 November when we accurately predicted this trend, “Inflation has risen faster than incomes. With supply chains disrupted during the COVID War, there have been shortages of raw materials, finished goods and components which have driven, and keep driving, prices higher,” developments we reported in “Commodities Supercycle Underway?” (11 May 2021), “Ag Products Beginning Mini-Supercycle, Executives Say, (22 Jun 2021), and elsewhere.

While inflation has been galloping along now above 8 percent, wages have grown by barely half as much (“Inflation Strengthens in September” 19 Oct 2021, and “U.K. Inflation Reaches Record 40-Year High in April” 24 May, 2022, and many other stories.)

Prices rise, wages lag, and economic production declines—conditions that define the world’s economy now—is the perfect recipe for Dragflation.