The global economy is likely to falter next year, but the risk of a hard landing has subsided despite high levels of debt and uncertainty over interest rates, the Organisation for Economic Cooperation and Development (OECD) said Wednesday.
Still, the Paris-based organization warned about the Israeli-Palestinian conflict, which it says could throw a spanner in the works.
In its latest economic outlook, the OECD trimmed its forecast for global growth this year to 2.9%, down from the 3% it estimated in September.
The grouping of developed industrialized countries said it sees global growth slowing to 2.7% next year, unchanged from its previous forecast. It will mark the lowest annual rate since the global financial crisis, aside from the first year of the COVID-19 pandemic.
A key factor is that the OECD expects the world's two biggest economies, the United States and China, to decelerate next year.
A rebound to 3% growth in 2025 is contingent on inflation slowing further and Asian economies maintaining their fast pace of growth.
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, Moscow’s war against 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."
"The broad picture for the world economy over the next two years is one of a moderate slowdown followed by eventual normalization, with growth returning to near-trend rates, and inflation converging back to central bank targets by 2025," said the OECD.
The OECD's chief economist, Clare Lombardelli, said in her introduction to the report that they "are projecting a soft landing for advanced economies, but this is far from guaranteed."
The OECD still sees near-term risks to its forecast tilted to the downside.
It pointed to the heightened geopolitical tensions due to the Israeli-Palestinian conflict as "a key source of near-term uncertainty" for the global economy.
"If the conflict were to intensify and broaden within the wider region, there are much stronger risks that could slow growth and push up inflation," said the OECD, which advises its 38 member countries on economic policy.
“This could result in significant disruptions to energy markets and major trade routes,” it said.
While the OECD had already projected a temporary, but pronounced, slowdown for Israel, it said the broader direct effects of the conflict on the world economy have so far been "relatively limited."
The slowdown in global growth is being driven by higher interest rates brought in by central banks to slow inflation, but growth should rebound as rates begin to come down along with inflation beginning next year.
The OECD raised its growth forecasts for Türkiye for 2023 to 4.5%, up from 4.3%. It sees the growth slowing to 2.9% in 2024 and 3.2% in 2025.
The organization said the inflation in Türkiye would end 2023 at 52.8%, up from its earlier estimate of 52.1%. It raised its expectations for 2024 from 39.2% to 47.4%.
The forecast for the U.S. economy has been raised by two-tenths of a percentage point for this year and 2024, to 2.4% and 1.5%, respectively. It sees a modest pick up to 1.7% growth in 2025.
The organization foresees U.S. inflation dropping from 3.9% this year to 2.8% in 2024 and 2.2% in 2025, just above the Federal Reserve’s (Fed) 2% target level.
Also likely to contribute to a global slowdown are the 20 countries 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.
It sees Britain's economy slowly gathering steam with growth rising to 0.5% this year, 0.7% in 2024 and 1.2% in 2025 as the country gradually recovers from a cost-of-living crisis.
Japan is also expected to experience a slowdown next year, with growth slowing from 1.7% to 1% before edging up to 1.2% in 2025.
The OECD marginally increased its forecast for growth in China to 5.2% this year.
However, the world's second-largest economy is still expected to see growth slow to 4.7% in 2024 and 4.2% in 2025 as gloomy consumers save, rather than spend, amid weak job creation and financial stress brought on by a real estate crisis.
China's "consumption growth will likely remain subdued due to increased precautionary savings, gloomier prospects for employment creation and heightened uncertainty,″ the OECD said.
