OECD warns of year-long recession as global economy stagnates

Many countries will experience a “full-year recession” in 2023 as the global economy stagnates in the face of “persistently high inflation”, the Organisation for Economic Co-operation and Development (OECD) has warned.

In its latest interim economic outlook the Paris-based agency cut its forecast for global growth next year to 2.3 per cent, down from 2.8 per cent previously, while warning that a dependency on expensive gas for heavy industry would plunge Germany, Italy and the UK into recession.

“As a consequence of the unexpected surge in prices, real wages are falling in many countries, slashing purchasing power. This is hurting people everywhere,” OECD chief economist Álvaro Santos Pereira said.“If inflation is not contained these problems will only become worse.”

The OECD also assessed the economic situation in Ireland, warning that falling real incomes would hold back consumer spending until the middle of next year, “despite significant wage growth”. This would lead to significant slowdown in growth in the Irish economy with modified domestic demand (MDD), a more accurate measure of domestic activity, expected to grow by just 0.9 per cent, down from a projected 8 per cent increase this year.

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[ High inflation may persist for years ]

While high costs and low confidence will reduce investment, exports in multinational-dominated sectors, though moderating, will remain supportive of growth in Ireland, it said.

The agency also noted that high corporate tax receipts were supporting the public finances and welcomed the Government’s decision to divert some of the additional revenue into a national reserve fund.

The Department of Finance expects corporate tax receipts to climb to a record €21 billion this year.

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While noting that indicators of global economic activity, such as retail sales, industrial production and international trade, have stabilised after a particularly weak second quarter, helped by fewer restrictive anti-Covid measures in China and a consequent rebound in activity, the OECD’s report said there was still a loss of momentum in many countries, especially in Europe.

It projected global growth in gross domestic product (GDP) terms would be 3.1 per cent in 2022, around half the pace seen in 2021 during the rebound from the pandemic, before slowing to 2.2 per cent in 2023.

Headline consumer price inflation in major advanced economies is projected to moderate from 6.3 per cent this year to around 4¼ per cent in 2023 before falling back to 2½ per cent in 2024.

“Our central scenario is not a global recession but a significant growth slowdown for the world economy in 2023, as well as still high, albeit declining, inflation in many countries,” Mr Santos Pereira said.

[ Irish business sentiment kept weak by inflation and supply chain pressures ]

“Risks remain significant. In these difficult and uncertain times policy has once again a crucial role to play: further tightening of monetary policy is essential to fight inflation, and fiscal policy support should become more targeted and temporary.”

He insisted the policy of increasing interest rates to curb inflation was “starting to pay off”.

“For example, in Brazil, the central bank moved swiftly, and inflation has started to come down in recent months. In the US the latest data also seem to suggest some progress in the fight against inflation,” he said.