World economy expected to slow due to inflation, high rates and war: OECD

The global economy, which has proved surprisingly resilient this year, is expected to falter next year under the strain of wars, still-elevated inflation and continued high interest rates.

The Paris-based Organization for Economic Cooperation and Development estimated Wednesday that international growth would slow to 2.7% in 2024 from an expected 2.9% pace this year. That would amount to the slowest calendar-year growth since the pandemic year of 2020.

Despite the gloomier outlook, the organization is “projecting that recessions will be avoided almost everywhere,” OECD Secretary-General Mathias Cormann said at a news conference.

However, he added, there are risks that inflation will stay persistently high and that the Israel-Hamas conflict and Russia’s war in Ukraine could affect prices for commodities, such as oil or grain.

A key factor in the slowdown is that the OECD expects the world’s two biggest economies, the United States and China, to decelerate next year. The U.S. economy is forecast to expand just 1.5% in 2024, from 2.4% in 2023, as the Federal Reserve’s interest rate increases – 11 of them since March 2022 – continue to restrain growth. The Fed’s higher rates have made borrowing far more expensive for consumers and businesses and, in the process, have helped slow inflation from its four-decade peak in 2022. The OECD foresees U.S. inflation dropping from 3.9% this year to 2.8% in 2024 and 2.2% in 2025, just above the Fed’s 2% target level.

For now, the American economy looks strong: The Commerce Department reported Wednesday that U.S. economic growth came in at a brisk 5.2% annual pace from July through September, helped by strong consumer spending and an uptick in private investment.

The Chinese economy, beset by a destructive real estate crisis, rising unemployment and slowing exports, is expected to expand 4.7% in 2024, down from 5.2% this year. China’s “consumption growth will likely remain subdued due to increased precautionary savings, gloomier prospects for employment creation and heightened uncertainty,” the OECD said.

Also likely to contribute to a global slowdown are the 20 countries in the European Union that share the euro currency. They have been hurt by heightened interest rates and by the jump in energy prices that followed Russia’s invasion of Ukraine.

The OECD expects the collective growth of the eurozone to amount to 0.9% next year – weak but still an improvement over a predicted 0.6% growth in 2023.

“A key takeaway today is the stronger outlook for the U.S., which we’ve revised up for 2024, but a weaker outlook for Europe, which we’ve revised down,” OECD chief economist Clare Lombardelli told reporters.

She pointed to the impact on Europe from the spike in energy prices last year after Russia cut off most of its natural gas to the continent. That sent costs soaring for households and businesses, driving a cost-of-living crisis and hurting factories in places like Germany.

The world economy has endured one shock after another since early 2020 – the eruption of COVID-19, a resurgence of inflation as the rebound from the pandemic showed unexpected strength, the war in Ukraine and painfully high borrowing rates as central banks acted aggressively to combat the acceleration of consumer prices.

Yet through it all, economic expansion has proved unexpectedly sturdy. A year ago, the OECD had predicted global growth of 2.2% for 2023. That forecast proved too pessimistic. Now, the organization warns, the respite may be over.

“Growth has been stronger than expected so far in 2023,” the OECD said in its 221-page report, “but is now moderating as the impact of tighter financial conditions, weak trade growth and lower business and consumer confidence is increasingly felt.”

Moreover, the OECD warned, the world economy is confronting new risks resulting from heightened geopolitical tensions amid the Israel-Hamas war – “particularly if the conflict were to broaden.”

“This could result in significant disruptions to energy markets and major trade routes,” it said.