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Russia and Germany to fall into recession as economic outlook darkens

Russia’s invasion of Ukraine, soaring energy bills and record-breaking inflation have thrown the global economy into disarray, triggering an “extended period of subdued growth,” according to the latest forecast by the Organisation for Economic Co-operation and Development (OECD).

Germany, the EU’s industrial powerhouse, is projected to fall into recession next year.

“The global growth outlook has darkened,” the OECD said, in a report titled “Paying the Price of War”released on Monday morning.

The study paints a bleak picture of the world economy: business confidence, disposable incomes and household expenditure all plummet while the costs of fuels, food and transportation surge.

Inflation has become “broad-based” and will gradually ease throughout 2023, but still remain exceptionally high, as tighter financial conditions resulting from steep hikes in interest rates slowly yield results.

For Europe, the forecast is particularly gloomy in the event of a colder-than-usual winter: underground gas storage would be depleted and energy prices would soar, prompting shortages and industrial paralysis.

“This would push many countries into a full-year recession in 2023,” the OECD says in the event of winter disruptions and enforced gas reductions.

The organisation also warns of the possibility that the sanctions against Russian oil, one of Moscow’s top revenue sources, could prove “more disruptive than anticipated.”

The EU-wide embargo will take effect at the end of the year, taking about two million barrels per day of Russian crude and refined products off the market.

If Russia is unable to reroute these supplies to other regions, international prices will shoot up, adding even more pressure on the already-volatile energy supply chains.

“The global economy has lost momentum this year,” the report notes. “After bouncing back strongly from the COVID-19 pandemic, a return to a more normal economic situation appeared to be in prospect prior to Russia’s unprovoked, unjustifiable and illegal war of aggression against Ukraine.”

Russia and Germany head into recession

Of all the countries analysed in the report, Russia is by far the worst-hit: the country, which has been hit by unprecedented Western sanctions, is projected to contract by 5.5% in 2022 and by 4.5% in 2023.

Meanwhile, Germany will end this year with a 1.2% positive expansion but will decline by 0.7% next year. Recession fears are looming large over the country, which until early this year was a large consumer of Russian gas and is now scrambling to find alternative suppliers.

“The signs of a recession for the German economy are multiplying,” Germany’s central bank, the Bundesbank, said last week.

A recession is defined as two consecutive quarters of decline in gross domestic product (GDP).

The other European economies included in the OECD’s study fare slightly better. France, Italy and Spain will see modest growth rates in 2023, at 0.6%, 0.4% and 1.5%, respectively, which means they could too fall into recession at one point but still end the year with moderate positive growth.

The eurozone will expand by 3.1% in 2022 and by a meagre 0.3% in 2023. Inflation will average 6.2% next year, over three times the 2% target desired by the European Central Bank.

These pessimistic estimations could deteriorate if the energy crisis takes a turn for the worse.

“Significant uncertainty surrounds the projections. More severe fuel shortages, especially for gas, could reduce growth in Europe by a further 1.25 percentage points in 2023,” the OECD says.

Speaking before the European Parliament on Monday afternoon, ECB President Christine Lagarde also struck an ominous note and warned “uncertainty remains high.”

“The outlook is darkening,” she told MEPs. “We expect activity to slow substantially in the coming quarters.”

Beyond the bloc, the OECD expects the United States to grow by 0.5% next year, while the United Kingdom will post a 0% rate, meaning it will neither expand nor contract.

Japan, Canada, Argentina, Brazil, South Africa and Mexico will all see limited rates, below the 2% mark.

China, a driving engine of the world economy that is pursuing a strict zero-Covid policy, will expand by 3.2% in 2022 and then speed up to 4.7% in 2023.

On the other hand, Saudi Arabia appears to enjoy an economic boom, “buoyed by high energy prices.” The oil-rich country is estimated to swell by almost 10% this year and 6% next year.

Overall, the world economy will grow by 3% in 2022 and 2.2% in 2023, a downward revision compared to the previous OECD estimate.

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