Introduction

Türkiye and the global economy overall are expected to grow more than expected this year, but the outlook for 2024 will mostly be weak as “painful” interest rate hikes aimed at curbing inflation take their toll, the Organisation for Economic Co-operation and Development (OECD) said Tuesday.

A stronger-than-expected U.S. economy is helping to keep a global slowdown in check this year, but a weakening Chinese economy will be a bigger drag next year, the OECD said in the latest update of its forecasts for major economies.

Global GDP Growth

After expanding 3.3% last year, global gross domestic product (GDP) growth is on course to slow to 3% this year, up from the 2.7% forecast in OECD’s June outlook.

But the Paris-based body said global growth was projected to remain “sub-par,” slowing to 2.7% next year – down from its estimate of 2.9% in June.

Monetary Policy Impact

“After a stronger-than-expected start to 2023, helped by lower energy prices and the reopening of China, global growth is expected to moderate,” the OECD said in its report.

“The impact of tighter monetary policy is becoming increasingly visible, business and consumer confidence have turned down, and the rebound in China has faded,” it added.

Central banks worldwide have sharply increased borrowing costs to tame consumer prices, which soared in the wake of Russia’s invasion of Ukraine last year.

“We are all seeing the tightening of monetary policy working its way through our economies. This is necessary to reduce inflation, but it is painful,” OECD chief economist Clare Lombardelli said at a press conference.

Central Banks and Inflation

The European Central Bank (ECB) raised a key interest rate to a record high last week but hinted this might be its last hike, while the U.S. Federal Reserve (Fed) is expected to pause its own campaign on Wednesday.

“Inflation is projected to moderate gradually over 2023 and 2024 but to remain above central bank objectives in most economies,” the OECD said.

Rising Credit Card Delinquencies

Inflation remains well above the 2% targets of the Fed and the ECB, and oil prices have rebounded in recent weeks. EU data on Tuesday showed eurozone inflation slowed slightly to 5.2% in August from 5.3% the previous month.

The Bank of England (BoE) and its peers in Türkiye, Norway, Sweden and Switzerland also make interest rate decisions on Thursday.

“Even if policy rates are not raised further, the effects of past rises will continue to work their way through economies for some time,” the OECD said.

Borrowing costs for companies and households have risen, while credit conditions have tightened, it said.

“Some countries are already seeing rising loan and credit card delinquency rates and increases in corporate insolvencies,” the OECD said.

The crisis at regional U.S. banks in March and the fire sale of European banking giant Credit Suisse show that “risks remain” that higher rates could “produce stresses in the financial system,” the report warned.

China Risk

The OECD also warned, “A sharper-than-expected slowdown in China is an additional key risk that would hit output growth around the world.”

The world’s second-biggest economy has struggled this year after three years of COVID-19 restrictions and massive debt in the property sector.

The OECD cut its outlook for China, with growth of 5.1% this year. It will slow to 4.6% in 2024, 0.5 percentage points lower than previously forecast.

In June, it had forecast 5.4% growth this year and 5.1% next year.

It expected the U.S. economy to grow 2.2% this year rather than the 1.6% it forecast in June as U.S. growth proves more resilient than most economists expected in the face of a series of rate hikes.

Nonetheless, it was likely to slow next year to 1.3%, which was better than the 1% for 2024 expected in June.

Although the U.S. economy “has so far proved unexpectedly resilient to the steep rise in policy interest rates,” the effects of tighter financial conditions “are expected to become increasingly visible,” the OECD said.

The improved U.S. outlook for this year helped offset weakness in China and the eurozone, dragged down by Germany – the only major economy expected to be in recession.

The organization lowered its forecasts for the eurozone, seeing a growth of 0.6% this year and 1.1% in 2024 as the German economy struggles.

Türkiye’s GDP is expected to expand 4.3% this year and 2.6% in 2024, the OECD said. In June, the organization saw the Turkish economy growing 3.6% in 2023 and 3.7% next year.

It sees Türkiye’s stubborn inflation, which shot back to nearly 60% in August, dropping to 52.1% by year-end, up from its earlier forecast of 44.8%.

The country’s annual inflation is expected to fall further to 39.2% in 2024, the OECD said.

Japan’s growth outlook was raised by 0.5 percentage points to 1.8% for 2023 but lowered by 0.1 points to 1% for 2024.

Though the growth outlook for next year would mostly be weak, the OECD said central banks should keep interest rates high until clear signs of inflationary pressures have subsided.