March 31, 2023

OECD Economic Outlook, Interim Report March 2023: A Fragile Recovery

  • Global growth slowed to 3.2% in 2022, well below expectations at the start of the year, held back by the impact of the war in Ukraine, the cost-of-living crisis, and the slowdown in China.
  • More positive signs have now started to appear, with business and consumer sentiment starting to improve, food and energy prices falling back, and the full reopening of China.
  • Global growth is projected to remain at below trend rates in 2023 and 2024, at 2.6% and 2.9% respectively, with policy tightening continuing to take effect. Nonetheless, a gradual improvement is projected through 2023-24 as the drag on incomes from high inflation recedes.
  • Annual GDP growth in the United States is projected to slow to 1.5% in 2023 and 0.9% in 2024 as monetary policy moderates demand pressures. In the euro area, growth is projected to be 0.8% in 2023, but pick up to 1.5% in 2024 as the effects of high energy prices fade. Growth in China is expected to rebound to 5.3% this year and 4.9% in 2024.
  • Headline inflation is declining, but core inflation remains elevated, held up by strong service price increases, higher margins in some sectors and cost pressures from tight labour markets.
  • Inflation is projected to moderate gradually over 2023 and 2024 but to remain above central bank objectives until the latter half of 2024 in most countries. Headline inflation in the G20 economies is expected to decline to 4.5% in 2024 from 8.1% in 2022. Core inflation in the G20 advanced economies is projected to average 4.0% in 2023 and 2.5% in 2024.
  • The improvement in the outlook is still fragile. Risks have become somewhat better balanced, but remain tilted to the downside. Uncertainty about the course of the war in Ukraine and its broader consequences is a key concern. The strength of the impact from monetary policy changes is difficult to gauge and could continue to expose financial vulnerabilities from high debt and stretched asset valuations, and also in specific financial market segments. Pressures in global energy markets could also reappear, leading to renewed price spikes and higher inflation.
  • Monetary policy needs to remain restrictive until there are clear signs that underlying inflationary pressures are lowered durably. Further interest rate increases are still needed in many economies, including the United States and the euro area. With core inflation receding slowly, policy rates are likely to remain high until well into 2024.
  • Fiscal support to mitigate the impact of high food and energy prices needs to become more focused on those most in need. Better targeting and a timely reduction in overall support would help to ensure fiscal sustainability, preserve incentives to lower energy use, and limit additional demand stimulus at a time of high inflation.
  • Rekindling structural reform efforts is essential to revive productivity growth and alleviate supply constraints. Enhancing business dynamism, lowering barriers to cross-border trade and economic migration, and fostering flexible and inclusive labour markets are key steps needed to boost competition, mitigate supply shortages, and strengthen gains from digitalisation.
  • Enhanced international cooperation is needed to help overcome food and energy insecurity, assist low-income countries service their debts, and achieve a better co-ordinated approach to carbon mitigation efforts.

Recent indicators point to stronger activity in early 2023

 Monthly data in early 2023 point to a near-term improvement in growth prospects in the largest economies. Activity data in the United States surprised on the upside in January, and labour markets remain tight across almost all G20 economies, including in Europe, supporting private consumption. Survey indicators have also strengthened from the troughs seen in late 2022. Consumer confidence has started to improve, and enterprise survey indicators have stabilised or rebounded in all major regions (Figure 2). In February, more firms reported rising output than falling output in all major economies, with substantial jumps in the United States, the euro area, China and the United Kingdom.

The improvement in activity and sentiment in the main G20 economies in early 2023 is due to the decline in global energy and food prices (Figure 3), which boosts purchasing power and should help to lower headline inflation, as well as the expected positive impact of China’s reopening on global activity. The fall in energy prices partly reflects the impact of mild winter temperatures in Europe, helping to preserve gas storage levels, as well as lower energy consumption in many countries. The impact of the measures taken against Russian energy exports has also been more limited than initially expected, with Russia largely maintaining export levels by expanding sales in other markets, albeit at substantially discounted prices. Food and fertiliser prices have also come down from their peak last year. Nonetheless, energy and food prices remain well above the levels seen prior to the pandemic, leaving many lower-income households still facing budget pressures. Food and energy security also remain fragile, especially in emerging and low-income economies and households.

Survey data point to a strong pick-up in China in January and February, and part of the pent-up household savings from the zero-COVID-policy period will likely be spent in 2023, boosting aggregate demand. A resumption in international travel by Chinese residents will provide a further boost to global air traffic and services trade, with the strongest gains likely in neighbouring Asian economies based on visitor patterns prior to the pandemic (Figure 4, Panel A). At the same time, stronger commodity demand from China, which accounts for a large share of consumption in many markets, is likely to put some upward pressure on commodity prices (Figure 4, Panel B). This is particularly the case if Chinese energy demand strengthens significantly, after stagnating in 2022.

Global financial conditions have tightened considerably since the start of 2022. Real long-term interest rates have risen sharply, triggering repricing across asset classes, including equities, and generating sizeable unrealised losses on the bond portfolios held by financial institutions. Signs of the impact of tighter monetary policy have started to appear in parts of the banking sector, including regional banks in the United States. In a number of economies, actual and expected credit growth has slowed, even turning negative in some recent bank lending surveys, including in the euro area. This is reflected in the related contraction of the broad money supply in several large economies, after the strong growth seen during the pandemic. The US M2 money supply aggregate recently declined on a year-on-year basis for the first time in more than 60 years. The sustained appreciation in the US dollar through much of 2022 has however been partially reversed, helping to bring down the domestic currency prices of imported food and energy in many countries.

Source: OECD
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