Europe to bear the brunt of global economic growth
Europe to bear the brunt of global economic growth
The Organization for Economic Co-operation and Development (OECD) says the global economy is facing significant challenges. Growth is losing momentum, high inflation has broadened out across countries, with Europe to be hit hardest in the global slowdown as the Ukraine war “provokes a massive energy price shock not seen since the 1970s.”

TEHRAN (Iran News) –The Organization for Economic Co-operation and Development (OECD) says the global economy is facing significant challenges. Growth is losing momentum, high inflation has broadened out across countries, with Europe to be hit hardest in the global slowdown as the Ukraine war “provokes a massive energy price shock not seen since the 1970s.”

According to the intergovernmental organization, high inflation has not only broadened out across countries and products but is also proving persistent.

It says energy supply shortages could push prices even higher and with interest rates increasing it has called on governments of the necessity to curb inflation and heighten financial vulnerabilities.

OECD says the Ukraine war has seen energy prices skyrocketing and is taking a heavy toll on the world economy, which will worsen if European gas storage runs short. This could force rationing in Europe, hurting countries worldwide as global gas prices are pushed higher.

With spot electricity prices generally being linked to the price of gas, the marginal source of electricity generation, record-high gas prices have meant similarly extreme wholesale electricity prices in Europe.

As a result, economic growth is forecast to be lower than expected and prices higher in Europe and worldwide. Retail energy prices have increased much less than wholesale prices, especially in Europe.

As Europe bears the brunt of the Ukraine war, the European Union’s business activity has taken a hit with the conflict seeing an energy price spike. The organization has forecast that the 19-country eurozone economy would grow by only 3.3% this year and then slow to 0.5% in 2023.

The OECD has predicted a contraction of 0.3% next year in Europe’s strongest economy Germany, whose industry-driven economy is highly dependent on Russian energy exports.

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

China, which is not an OECD member, was one of the few major economies expected to see growth pick up next year

Those exports have been sanctioned by the West and the move appears to have backfired on households across Europe who are facing skyrocketing gas bills this winter. This comes amid what the organization has labeled as the worst energy crisis since the 1970s which will trigger a sharp slowdown.

Labour market conditions generally remain tight, but wage increases have not kept up with price inflation, weakening real incomes for workers despite the actions taken by governments to cushion the impact of higher food and energy prices on households and businesses.

Tighter monetary policy and higher real interest rates, persistently high energy prices, weak real household income growth, and declining confidence are all expected to sap growth. The United States and Europe are slowing sharply and the major Asian emerging-market economies are expected to account for close to three-quarters of global GDP growth in 2023.

The uncertainty about the outlook is high, and the risks have become more skewed to the downside and more acute. The projections reflect the toll taken by high energy prices over the next two years, but outcomes could be weaker still if there are energy supply shortages in global markets that raise prices further, or if enforced rationing is required to lower gas and electricity demand sufficiently during the next two European winters.

The OECD’s economic outlook paints a grim picture.

Its general assessment suggests the global economy is facing mounting challenges with financial conditions that have tightened significantly, amidst the unusually vigorous and widespread steps to raise policy interest rates by central banks in recent months, weighing on interest-sensitive spending and adding to the pressures faced by many emerging-market economies.

“We are certainly projecting a period of pronounced weakness,” OECD head Mathias Cormann told a news conference to present the organization’s latest Economic Outlook.

Global prospects are also becoming increasingly imbalanced, with the major Asian emerging-market economies accounting for close to three-quarters of global GDP growth in 2023, reflecting their projected steady expansion but on the other hand, it has predicted sharp slowdowns in the United States and Europe.

To tackle higher inflation, many central banks in the West have hiked interest rates in an effort to curb the cost-of-living crisis.

But the OECD says higher policy interest rates could also slow growth by more than projected, with policy decisions difficult to calibrate given high debt levels and strong cross-border trade and investment links that raise the spillovers from weaker demand in other countries. Widespread and rapid monetary tightening also heightens financial vulnerabilities.

This is while slowing growth and rising interest rates have weighed on equity markets in most advanced economies.

It argues that continued monetary policy tightening is needed in most major advanced economies to anchor inflation expectations and lower inflation durably.

The organization says better government support to help cushion the impact of high energy costs on households and companies is needed.

The war in Ukraine as well as the Covid pandemic have added to the longstanding challenges for growth, resilience, and well-being from the acceleration of digitalization, population aging, and the need to lower carbon emissions.

Effective and well-targeted reform efforts are required to enhance productivity and skills, reduce inequality and improve gender balance, strengthen resilience and boost living standards, the OECD reported.

Well-chosen policies, such as increased support for childcare and reduced tax wedges for lower-paid workers, could help to address the current pressures faced by lower-income households and also offer medium-term benefits for employment and inclusion.

In many Western countries, the UK is the latest, critics say the government has taken the opposite measures by imposing higher taxes on struggling households, which include those from middle-class backgrounds, who are now feeling the squeeze of inflation.

The OECD also touched on the fallout from the Ukraine war saying it remains a threat to global food security, particularly if combined with further extreme weather events resulting from climate change.

It has called on better international cooperation to address emergency food needs and strengthen domestic supply. Stronger international cooperation on debt relief, including through the G20, is also necessary to minimize the potential adverse economic and social consequences, with a rising number of lower-income developing countries already experiencing debt distress and having fragile banking sectors.

The unexpected persistence of inflationary pressures this year owes much to the outbreak of the war in Ukraine, which resulted in an immediate spike in a number of key commodity prices – for oil, gas, and coal, a range of metals, wheat, and corn, and some edible oils, as well as fertilizers.

Also, while wage growth has picked up in most economies, it has not kept pace with inflation, resulting in a sharp erosion of wages in real terms in many OECD economies.

In essence, the report says the war in Ukraine (on the backdrop of recovery from the Pandemic) is having a persisting adverse effect on economic conditions. Global GDP stagnated in the second quarter of 2022, with sharp falls in output and a contraction of output with Europe hit harder than expected but the United States and other developing countries were affected as well.

This spells misery for families across the West and beyond while adding to the growing calls for Western governments to help lay out peace initiatives and end the crisis in Ukraine.

  • source : Tehrantimes