OECD Update Underscores US-China Economic Divergence

The OECD is concerned about the outlook for the global economy.

That’s a tautology depending on what you mean by “concerned.” It’s the Organization for Economic Co-operation and Development. So, you know, what else are they concerned about if not the global economy?

But here, “concerned” means worried. I won’t spend an inordinate amount of time on the group’s latest forecasts because it’s not tradable, but for whatever it’s worth, an interim outlook released on Tuesday suggested global growth will be 3% this year (an upward revision versus June’s forecast) and just 2.7% in 2024 (a downward revision from three months ago).

As the figure shows, 2.7% in 2024 would be the worst year since the financial crisis outside of COVID.

“The global economy proved more resilient than expected in the first half of 2023, but the growth outlook remains weak,” the color accompanying the new report said. “With monetary policy becoming increasingly visible and a weaker-than-expected recovery in China, global growth in 2024 is projected to be lower.”

At the country level, the OECD revised the outlook for China down markedly. Growth across the world’s second-largest economy should be around 4.6% in 2024, the update said. That projection was 5.1% just three months ago. By contrast, the OECD marked up their forecasts for the US economy, and rather dramatically for this year.

The figure above is a bit confusing at first glance, but if you take a moment to observe what’s plotted on which axis, it’s simple: The grey and green bars, plotted on the left axis, show the scope of the OECD downgrade or upgrade versus the June forecasts. So, again, growth will be half a percentage point lower in China next year (green bar for China), while the US economic expansion will be 0.6% more robust this year than the OECD saw in June (grey bar for the US).

Earlier this month, Bloomberg Economics released a report suggesting China may no longer be on track to surpass the US economically, or at least not for any sustained period.

“Three years of ‘COVID zero’ lockdowns have left lasting scars and cynicism about public policy,” the report read. “What’s more, crackdowns on private businesses — including in tech and real estate — have put entrepreneurs on guard and quashed animal spirits.”

The table below shows BE’s forecasts under various economic and geopolitical scenarios.

The OECD spent quite a bit of time on Tuesday editorializing around a prospective sharper slowdown in China. Suffice to say the implications for the world would be pronounced if Xi Jinping doesn’t manage to turn things around.

Elsewhere in the update, the OECD fretted over stubborn core inflation (attributed to services sector resilience and tight labor markets) and said risks are still “tilted to the downside.”

Price growth, the report cautioned, “could continue to prove more persistent than anticipated, with further disruptions to energy and food markets still possible,” while a sharper slowdown in China “would drag on growth around the world even further.”

Finally, the OECD warned, “public debt remains elevated in many countries.”

I’ll leave you with one final chart. The figure below shows the new projections across locales. Saudi Arabia sticks out for the expected acceleration next year. Note also that India is expected to keep outgrowing China, which is meaningful in the context of tension between Xi and Narendra Modi, and associated questions around intra-BRICS harmony.


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