New OECD Interim Economic Outlook recommendations underestimate the risk of a global recession

OECD Interim Economic Outlook fails to grasp the risks of joint and unprecedented monetary and fiscal tightening

The OECD released its Interim Economic Outlook, Paying the Price of War. It projects global growth to go down from 3% in 2022 to 2.2% in 2023, with economic activity in the US (0.5%) and the Euro Area (0.3%) almost grounding to a standstill. Compared to the June edition of the Economic Outlook, these figures confirm GDP projections for 2022, while considerably downgrading those for 2023. They fall short of predicting a full-fledged recession next year. In addition, the OECD warns that the possibility of gas supply disruptions in Europe, COVID-19 related shutdowns, residential property turmoil in China and debt crises in highly indebted emerging economies imply significant downwards risks, leaving space for grimmer predictions for later this year.

The OECD’s interim forecast fails however to identify the other and very tangible risk coming from the currently ongoing tightening of both monetary and fiscal policies in the world economy. While, according to the World Bank, the share of economies contracting their fiscal stance is greater today than during the global austerity drive following the financial crisis, there is at the same time also a widespread monetary tightening being enacted as the vast majority of central banks around the world are hiking interest rates.

The danger is that this across-the-board tightening of macroeconomic policy is going too far and is pushing economies into a global and deep recession that will costs us dearly in terms of lost jobs, higher inequalities and failure to do the urgently needed climate change investment. Meanwhile, squeezing global demand will in no way address the structural problem and the root cause of skyrocketing inflation which is economies overly depending on fossil energy.

Even worse, by adding the loss of jobs and income to the “cost-of-living” crisis already eroding the purchasing power of wages, a recession will seriously undermine living standards of those households at the bottom of the income distribution. Indeed, while lower income households spend a higher proportion on energy and food, low wage workers, workers in unstable contracts and other workers who are vulnerable in the labour market are also likely to be the first to hit by job restructuring.

TUAC regrets that the OECD not only refrains from mentioning this risk but is even doubling down on the global policy of squeezing aggregate demand, by supporting central banks in their quest to fight supply side driven inflation and raise interest rates as high as 4 to 4.5%. There is little evidence for the OECD’s fear of inflation becoming entrenched because of so-called wage-price spirals as nominal wage growth is not keeping up with inflation and is thus dampening, not amplifying, the initial inflationary shock.

Furthermore, TUAC expected the interim forecast to incorporate the key lessons delivered by the OECD’s Employment Outlook published two weeks ago: labour markets are not perfectly competitive, and employers do have the power to set wages below the value that is added by workers to their business. Unequal bargaining power in turn implies that workers, especially vulnerable workers, are not able to negotiate wage increases to keep up with price increases, thus casting serious doubt on the possibility of further inflationary wage-price spirals. Based on this evidence, the Employment Outlook not only called for “comprehensive negotiations between governments, workers and firms to fairly share the cost” but also for giving “a new impetus to collective bargaining” to rebalance bargaining power and protect living standards.