Germany is expected to experience the heaviest blow from a slowdown in the world economy driven by higher interest rates and weaker global trade, the Organisation for Economic Co-operation and Development has warned.
In downbeat forecasts for the world economy, the Paris-based organisation said Europe’s largest economy was likely to be the only G20 country apart from Argentina to shrink this year during a wider international slowdown.
The organisation left its 2023 forecasts for UK growth unchanged at 0.3%, the third weakest in the G20 outside of Germany and Argentina. It cut its estimate for UK growth in 2024 from 1% to 0.8%, with only Argentina weaker in the G20.
The UK is expected to have the highest inflation in the G20 after Turkey and Argentina, with an average rate for 2023 of 7.2%, before dropping closer to the middle of the pack with a rate of 2.9% expected in 2024.
After a stronger-than-expected start to 2023, helped by lower energy prices and China’s easing of Covid restrictions, the OECD said activity across leading countries was slowing towards the end of the year before a weaker 2024.
The impact of higher interest rates to tackle sky-high inflation after Russia’s invasion of Ukraine has added to pressure on households and businesses, while Germany’s manufacturing-heavy economy grapples with weaker global trade volumes.
Growth in China – an important German trade partner – had been weaker than anticipated, according to the OECD, while economic activity across Europe was under strain from stubborn inflation and higher interest rates.
Cutting the growth forecasts in its interim economic outlook, it said Germany’s economy was on track to shrink by 0.2% this year, down from an estimate for zero growth made in June. It also issued Germany with the sharpest downgrade among EU countries covered in the report for 2024, forecasting growth of 0.9%, down from a previous estimate of 1.3%.
Clare Lombardelli, the OECD chief economist, said: “You’re seeing weaker growth across all of Europe but Germany is probably the largest example. You’re seeing the impact of inflation on real incomes. That’s been suppressing consumer demand. And you’re seeing impact of monetary policy tightening.
“Germany, perhaps more than other EU economies, is affected by the slowdown in China. It exports a lot to China, as well as imports, so it’s a combination of factors.”
She said the OECD did not anticipate recessions across any of the big economies, although cautioned activity would remain weak and warned there were risks to the forecast if inflation remained stubbornly high or activity in China deteriorated further. Households and businesses remained under pressure from high interest rates. “We’re not out of the woods yet on inflation. It’s far too soon to declare victory,” she said.
Overall, the OECD expects growth across the world economy to remain sub-par this year and next, with growth of 3% in 2023 before a slowdown to 2.7% in 2024. While inflation was subsiding, it said pressures were persistent in many economies – held up by cost pressures and high company profit margins in some sectors.
The body representing 38 of the world’s richest countries urged central banks to keep interest rates in “restrictive” territory until there were clear signs that underlying inflationary pressures were fading. However, this would add to the risk of weaker economic growth by hitting business and consumer confidence.
Economists anticipate the world’s leading central banks are nearing the end of the most aggressive cycle of interest rate hikes in decades, amid growing concerns over the impact of previous increases hitting economic activity.
The European Central Bank last week increased rates to the highest level since the creation of the euro in 1999. The US Federal Reserve is expected to leave borrowing costs unchanged on Wednesday, while the Bank of England is likely to raise interest rates for the final time in the current cycle on Thursday after 14 increases.
Lombardelli said: “We’re seeing monetary policy having an impact. It’s reining in demand – that’s necessary to tackle this inflation challenge – but it means we have lower growth.”