World faces worst energy crisis since 1970s, Europe even worse
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 Organization for Economic Co-operation and Development (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
It forecast that world economic growth would slow from 3.1 per cent this year – slightly more than the OECD foresaw in its September projections – to 2.2 per cent next year, before accelerating to 2.7 per cent 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 organization’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 eurozone economy would grow 3.3 per cent this year then slow to 0.5 per cent in 2023 before recovering to expand by 1.4 per cent in 2024. That was slightly better than in the OECD’s September outlook, when it estimated 3.1 per cent growth this year and 0.3 per cent in 2023.
The OECD predicted a contraction of 0.3 per cent next year in regional heavyweight Germany, whose industry-driven economy is highly dependent on Russian energy exports – less dire than the 0.7 per cent 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 per cent next year. Italy was seen eking out 0.2 per cent growth, which means several quarterly contractions are probable.
Outside the eurozone, the British economy was seen shrinking 0.4 per cent next year as it contends with rising interest rates, surging inflation and weak confidence. Previously the OECD had expected 0.2 per cent growth.
The U.S. economy was set to hold up better, with growth expected to slow from 1.8 per cent this year to 0.5 per cent in 2023 before rising to 1.0 per cent in 2024. The OECD had previously expected growth of only 1.5 per cent 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 per cent this year to 4.6 per cent in 2023 and 4.1 per cent in 2024, compared with previous forecasts of 3.2 per cent in 2022 and 4.7 per cent for 2023.
As tighter monetary policy takes effect and energy price pressures ease, inflation across OECD countries was seen falling from more than 9 per cent this year to 5.1 per cent 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.
Europe’s energy crisis even worse
Paolo Gentiloni, European Commissioner for the economy warned, if Russia’s war in Ukraine doesn’t end by the time next winter hits, Europe’s energy woes will dramatically worsen.
The uncertainty will weigh heavily upon the continent’s economy as it tries to emerge from the energy crisis and record-breaking inflation, a double whammy that is wreaking economic havoc across the bloc.
“According to our forecast, we could start the recovery already in mid-2023 and we could have inflation decreasing in the second half of 2023,” Gentiloni told Euronews on Tuesday afternoon.
Over the summer, EU countries rushed to fill their underground gas storages before the Kremlin permanently cut off the majority of supplies in retaliation for Western sanctions.
For countries with high levels of debt and narrow fiscal space to accommodate new expenses, the commissioner recommended they tap into the EU’s common resources, such as REPowerEU, which channels the loans left unused in the COVID-19 recovery fund.
“The recession is not a given,” Gentiloni said.
“What is (included) in our forecast is a short period of contraction that could be limited to this quarter and the first quarter of next year, followed by a subdued recovery of the economy. And we have to work on this to avoid a long-lasting recession.”
A recession is technically defined as two consecutive quarters of negative growth, but other measures and variables can be factored in before the label is applied.
Part of the article was reported by Reuters.