The Organisation for Economic Co-operation and Development (OECD) slashed its predictions for global economic growth in 2022 on Wednesday amid a devastating Russian war on Ukraine and crises in both the energy and food sectors that are driving up inflation and slowing economic advancement.
China’s “zero-COVID” policies, which have further scrambled manufacturing supply chains, also are weighing on a world economy that was just starting to rebound from the COVID-19 pandemic, the Paris-based OECD said, becoming the latest institution to slash its growth forecast and underscoring the dimming economic outlook.
These developments have “set the global economy on a course of slower growth and rising inflation — a situation not seen since the 1970s,” the organization said.
The OECD, a club of largely wealthy nations (including Israel), projected that global growth would decelerate sharply to around 3% in 2022 and 2.8% in 2023, all well below the 4.5% recovery projected in the previous report last December.
In Israel, the OECD projected economic growth to grow by 4.8% in 2022 and 3.4% in 2023, down slightly from the organization’s predictions in its last report (where it said Israel’s economy would grow by 4.9% in 2022 and 4% in 2023).
The OECD said Israel’s high-tech sector will continue showing strength, “with exports and investment growing at a robust, albeit more moderate, pace” and a “strong labor market recovery will support consumption growth.”
Inflation will gradually slow and will only slightly exceed the Bank of Israel’s target range in 2023, the OECD said. The central bank had indicated an upper inflation range of up to 3%, but Israel is currently at about 4% inflation as of April.
Inflation is forecast at nearly 9% for the OECD’s 38 member countries, which include the United States, United Kingdom and many European nations, nearly double the previous estimate.
Last month, the Bank of Israel raised its benchmark interest rate by 0.4 percentage points, from 0.35% to 0.75%, in the second rate hike in two months as it seeks to tamp down inflation
The OECD does see some potential clouds for Israel. A prolonged war in Ukraine “could adversely affect the economy through more persistent inflation and lower demand from trading partners,” it said. New waves of COVID-19 infections or new strains could heighten uncertainty, as could the precarious position of the current government, and any increase in terror or security incidents. These could “heighten uncertainty, weighing on consumption and investment,” the OECD said, adding that “on the upside, growth could be stronger if the high-tech boom continues unabated.”
The OECD said in December that the Israeli economy rebounded strongly in 2021, beating forecasts, and owing strongly to the country’s vaccination campaign, a recovering labor market, and a booming local tech sector that raised some $26 billion last year.
“Russia’s war is indeed imposing a heavy price on the global economy,” OECD Secretary-General Mathias Cormann said at a press conference in Paris. He urged Russian President Vladimir Putin to “stop this atrocious, senseless war now.”
The organization released its forecast as it gears up for a two-day annual meeting starting Thursday, attended by government ministers and featuring video remarks by Ukrainian President Volodymyr Zelensky.
The OECD warned that the economic turmoil will hit the poor the hardest. The war is disrupting supplies of food staples like wheat and energy, of which Russia and Ukraine are major global suppliers, fanning inflation that eats away at disposable income and living standards, it said.
The war is hurting economic growth in European nations the most because they are more exposed to the war through trade and energy links. But the OECD also raised the alarm about poor countries farther afield facing food shortages.
“We’re very concerned about the food situation in low-income countries. The war is really sending shockwaves all the way to Africa and the Middle East,” OECD chief economist Laurence Boone said. “The war could spark starvation. It could cause social unrest and political turmoil.”
She said China, long an engine of global growth, has become a source of economic volatility by “gumming up supply chains” already snarled by the pandemic.
China’s pandemic-fighting policies involving draconian lockdowns in Shanghai and other cities brought economic life to a standstill. That’s left a backlog of container ships waiting to dock at Chinese ports and companies worldwide facing problems with deliveries of their goods, highlighting supply chain bottlenecks that threaten to raise prices for consumers, Boone said.
The World Bank, United Nations and International Monetary Fund have made similar downgrades to their economic forecasts recently.