GERMANY: The Organisation for Economic Co-operation and Development (OECD) has cautioned that Germany is set to bear the brunt of a global economic slowdown caused by elevated interest rates and a decline in global trade.
In a gloomy outlook for the global economy, the OECD, headquartered in Paris, indicated that Germany, Europe’s largest economy, is expected to be the sole G20 nation, aside from Argentina, to experience economic contraction this year amid a broader international economic downturn.
Following a better-than-anticipated kickoff to 2023, boosted by lower energy costs and China’s relaxation of COVID-related restrictions, the OECD noted that economic activity in major countries was decelerating towards the end of this year before a weaker 2024.
The imposition of higher interest rates as a measure to combat soaring inflation following Russia’s invasion of Ukraine has further strained the financial burdens on households and businesses, while Germany’s economy, which is heavily reliant on manufacturing, is wrestling with diminished global trade volumes.
China, a significant trading partner for Germany, experienced growth that was lower than initially expected, as reported by the OECD. Concurrently, the European economy was grappling with persistent inflation and elevated interest rates, placing strain on economic activity.
In its interim economic outlook, the OECD lowered its growth projections, indicating that Germany’s economy is now expected to contract by 0.2% this year, a downward revision from the June estimate of zero growth.
Additionally, the OECD issued the most significant downgrade among EU nations included in the report for 2024, forecasting a growth rate of 0.9%, down from the earlier estimate of 1.3%.
“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 the impact of monetary policy tightening,” said OECD chief economist Clare Lombardelli.
“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,” Lombardelli added. She stated that the OECD hadn’t predicted recessions in major economies, but she did offer a word of caution, highlighting the persistent weakness in economic activity.
She also expressed concerns about the forecast being at risk if inflation continued to stay high or if China’s economic situation worsened. “We’re not out of the woods yet on inflation. It’s far too soon to declare victory,” she stated.
Overall, the OECD anticipates that global economic growth will continue to be below average for this year and the next, projecting a 3% growth rate in 2023, followed by a slowdown to 2.7% in 2024.
While inflation was showing signs of easing, the report pointed out that persistent pressures remained in many economies, driven by cost factors and robust profit margins in certain sectors.
The organisation maintained its 2023 projections for UK economic growth at 0.3%, ranking it as the third weakest among G20 countries. However, it revised down its 2024 estimate from 1% to 0.8%.
In 2023, the UK is anticipated to experience the third-highest inflation within the G20, following Turkey and Argentina, with an average rate of 7.2%. However, by 2024, it is expected to move towards the middle of the pack with a projected inflation rate of 2.9%.
The association representing 38 of the world’s wealthiest nations has advised central banks to maintain “restrictive” interest rates until clear indications of diminishing inflationary pressures emerge. However, this approach carries the risk of dampening economic growth by undermining business and consumer confidence.
Economists anticipate that the world’s major central banks are approaching the conclusion of one of the most aggressive cycles of interest rate hikes in decades, amid growing concerns about the potential negative impact of prior rate increases on economic activity.
Last week, the European Central Bank raised rates to their highest level since the inception of the euro in 1999. The US Federal Reserve is expected to keep borrowing costs unchanged on Wednesday, while the Bank of England is likely to implement its final interest rate hike in the current cycle on Thursday, marking a total of 14 increases.
“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,” Lombardelli continued.
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