The global economy has lost momentum in the wake of Russia’s war of aggression in Ukraine

OECD Interim Economic Outlook warns of pervasive global economic slowdown

 

"The global economy has lost momentum in the wake of Russia’s unprovoked, unjustifiable and illegal war of aggression against Ukraine..."

The global economy has lost momentum in the wake of Russia’s war of aggression in Ukraine, which is dragging down growth and putting additional upward pressure on inflation worldwide, according to the OECD’s latest Interim Economic Outlook.

The Outlook projects global growth at a modest 3% this year before slowing further to just 2.2% in 2023.  This is well below the pace of economic growth projected prior to the war and represents around USD 2.8 trillion in foregone global output in 2023.

The war has further pushed up energy prices, especially in Europe, aggravating inflationary pressures at a time when the cost of living was already rising rapidly around the world due to lingering impacts of the Covid-19 pandemic.  With businesses across many economies passing through higher energy, transportation and labour costs, inflation is reaching levels not seen since the 1980s, forcing central banks to rapidly tighten monetary policy settings faster than anticipated.

The inflation and energy supply shock stemming from the war has led the OECD to revise its previous growth projections downward worldwide.  Annual GDP growth is projected to slow to around 1/2% in the United States in 2023, and 1/4% in the euro area, with risks of deeper declines in several European economies during the winter months.  Growth in China has also been hit and is expected to drop to a projected 3.2% in 2022.  Except the 2020 pandemic, this will be the lowest growth rate in China since the 1970s.

Inflation is projected to recede gradually through 2023 in most G20 countries as tighter monetary policy takes effect and global growth slows.  Headline inflation is projected to ease from 8.2% this year to 6.6% in 2023 in the G20 economies, and fall from 6.2% this year to 4% in 2023 in the G20 advanced economies.

“The global economy has lost momentum in the wake of Russia’s unprovoked, unjustifiable and illegal war of aggression against Ukraine.  GDP growth has stalled in many economies and economic indicators point to an extended slowdown,” OECD Secretary-General Mathias Cormann said during a presentation of the Outlook.  “Inflationary pressures that were already present as the global economy emerged from the pandemic have been severely aggravated by the war.  This has further driven rising energy and food prices that now threaten living standards for people across the globe.”

The OECD points to substantial uncertainty about the economic outlook, with significant downside risks.  These include the possibility of further food and energy price spikes, which could push many people into poverty, as well as the possibility of gas shortages as winter progresses in the Northern hemisphere.  Reducing energy consumption and diversifying supply sources will be critical to avoid shortages, which would push global energy prices up, damage confidence, and likely worsen financial conditions and require a temporary period of enforced reduction of gas use by businesses.

Taken together, these shocks could reduce growth in the European economies by over 1¼ percentage points in 2023, relative to the Outlook’s central projection, and raise inflation by over 1½ percentage points.  This would push many countries into a full year recession in 2023, while GDP growth would also be weakened in 2024.

Other key risks are that the ongoing adjustments in Chinese property markets - combined with the high level of corporate debt in China and continuation of the country’s “zero-Covid” policy - could generate a more severe slowdown in the world’s second largest economy than projected.  This risk comes on top of continued costs from global supply chain pressures, and possible debt crises and financial contagion in many emerging-market and low-income economies.  

Further monetary policy tightening will be needed in most major economies to ensure that inflation pressures are reduced durably.  This will need to be calibrated carefully given uncertainty about the speed at which higher interest rates will take effect and spillovers from tightening in the rest of the world.

Fiscal support can help cushion the impact of high energy costs on households and companies, but should be concentrated on aiding the most vulnerable and preserve incentives to reduce energy consumption.  Fiscal actions to cushion living standards must avoid persistent stimulus at a time of high inflation.  Means-tested transfers to households broadly meet this criteria.

Managing the energy crisis requires renewed efforts to secure alternative supplies while ensuring all sectors of the economy are incentivised to reduce demand.  There is also an urgent need for governments to accelerate investment in energy security and invest in the green transition.

For the full report and more information, visit the Economic Outlook online. Media queries should be directed to the OECD Media Office (+33 1 4524 9700)

26/9/2022

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Local banks: Vital for the Caribbean's economic recovery strategy

By Dr Isaac Newton

The recapitalization of the banking industry in North America and Europe, which transferred massive wealth from the public sector, to a selected elite cadre of the private sector, is now showing some positive signs in this global recession.


But some economists warn that these early signs offer more hope to political leaders, than the somber reality of the market warrants. Overall, the global economy continues to forecast steady contraction, yet governments in the Caribbean owe their survivability to the generosity, stability and resilience of local banks.

Local banks are best positioned to foster hopeful contrasting scenarios for the Caribbean’s domestic economy, if governments take proactive steps and provide local banks with lighter regulations and fiscal incentives. There are several factors that account for these banks pivotal contribution to local economies.

First, indigenous banks have supported much of the governments’ social and infrastructural programs to the tune of hundreds of millions in loans and credit. But reduced credit lines and liquidity shortage--consequences of the global economy, from which locals banks must recover-- are having an adverse effect on the region’s long-term growth prospect.

Second, local banks are also forced to manage operational challenges, which have impinged on their capital scope. Yet, indigenous banks are part of the answer to point the Caribbean in the direction of economic improvement. By keeping internal customers employed, they continue to lesson the human cost of the impact of this market recession.

Third, typical of a Caribbean mindset that things foreign are superior, local banks are forced to function against a false but widespread belief, that simply because major regional and international conglomerations have failed, local banks are likely to go under. This is not true. What is true historically is that indigenous banks have offered much more support to local businesses than foreign owned competitors. And, they have accomplished this, by tailoring their programs to fit the nuances of the region’s cultural needs.

Fourth, local banks emphasize employment initiatives by keeping small business from going under. For example, in cases where customers are experiencing difficulties servicing their debts, local banks are more likely to help them consider lower payments or identify models that may lead to the early retirement of other current debt. In other instances, local banks help customers consider smaller loans requests to keep their businesses afloat.

Fifth, local banks have extended second life chances to governments in the region. Yet governments have not yet brought forth remedies to address the local financial circumstances by leveraging the resourced intelligence of local banks. Now more than ever, the need for local banks to help their customers get access to finances specific to their unique needs is urgent.

No one is sure how this changed economic landscape will turn out. The free market economy as we knew it has been altered by unethical behaviors of several prominent financial institutions and poor governmental regulations. This means that prudent financial decisions must be pursued by regional governments. If not, they will subject the people to worse forms of economic drag and stagnation than they are faced with today.

But regional governments can use this depressed economic climate as prime-time opportunity to partner with local banks. They could:

• Repay outstanding loans to local banks from funding received from various international agencies and institutions and from tax revenues. This will boost financing and help local banks resume more flexible lending practices. These practices are designed to match individualized needs,
  
  


• Provide innovative tax breaks to local banks so that they can reduce economic inactivity. Governments must be mindful that sound economic recovery will depend on the success of local banks.
  
  


• Inject local banks with confidence-building capital; local banks are likely to become drivers for growth that will facilitate steady economic upswing, ensuring future prosperity for the Caribbean,
  
  


• Reduce security risks to the business environment in general but pay special attention to the explicit security risks that local banks face.
  
  


• Draw on the skills of local banks to help them plan for a worst case option, should in case recovery plans fail. Local banks are equipped with the right personnel critical to help governments activate initiatives leading to long-term growth recovery and regional financial strength and,
  
  


• Remove adverse economic policy making barriers to the growth and profitability of local banks.

However, there is not sufficient clarity about the strategic aims of regional governments’ economic recovery plans. On the positive side, governments have at least identified broad recovery areas: lessening expenditure, borrowing from the IMF as a form of fiscal discipline en-route to downsizing the public sector, and intentions to preserve employment.

It is glaring nonetheless, that governments’ revitalization plans do not generally include a radical vision to expand special skills designed to put the right mix of talent in the right places, in order to take advantage of every opportunity for sustainable prosperity.

But with all the uncertainties that exist, another thorny issue irritating regional governments is how to take proactive actions to cut cost, while preserving portions of the social safety network that employment in the public sector represents for the masses.

Given the small, fragile nature of regional economies, local banks must be given the flexibility to support people and businesses without choking growth. I suspect that greater lending capacity by local banks can pull the economy back to satisfactory growth levels.

The Caribbean’s economy is expected to be dismal for the next five years. So whether in Antigua and Barbuda, St Lucia, Dominica, St Vincent, Barbados and St Kitts and Nevis or Trinidad, Jamaica and Guyana, governments will continue to face short, middle and long term challenges to their economies.

To confidently move forward, honest assessments must be undertaken. In retrospect, the region’s economic troubles were not exclusively caused by unbelievable greed and the irresponsible pursuit of power that occurred on Wall Street. Much of the problem is a sobering reminder of gross mismanagement of local economies. Expressions of this include:

• Failure to innovate tourism dependent, financial services and real estate industries
  
  


• Failure to capitalize on global financial trends through research and innovation
  
  


• Failure to explore new alternative energy, global sports and leisure markets
  
  


• Failure to adjust quickly to North America’s and Europe’s protracted economic depression
  
  


• Failure to be more fiscally disciplined while incentivizing productivity in the private sector and,
  
  


• Failure to tighten spending by reducing an already overburdened public sector and to increase credit rating

Regional governments should make sure that the economic climate is beneficial to local banks, especially if public/ private partnerships are going to be used as a credible means to finance important projects. Giving local banks the right mechanism so that they could become a credible alternative to cross-border financing, must be part of the region’s tough task, of pulling itself out of recession. 

November 9, 2009


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