US Economy to Slow Due to Sticky Inflation, Persistent Supply Woes: OECD

People shop at a grocery store in New York City on May 31, 2022. Samira Bouaou/The Epoch Times

The Organization for Economic Cooperation and Development (OECD) has cut its growth forecast for the U.S. economy, blaming high inflation that could take longer to dissipate as supply disruptions persist in part because of the Ukraine war and China’s COVID-19 lockdowns.

U.S. gross domestic product (GDP) is expected to weaken to 2.5 percent in 2022, from a prior estimate of 3.7 percent, the international agency said in its most recent Economic Outlook, released on June 8. The U.S. growth forecast for 2023 has been cut to just 1.2 percent from a previous estimate of 2.4 percent.

Inflation in the United States has broadened, seeping into categories other than goods, the OECD noted, while predicting that the PCE inflation rate for 2022 would hit 5.9 percent.

That’s far higher than the 4.4 percent the OECD predicted in its December 2021 projection, prior to Russia’s invasion of Ukraine.

“With risks biased to the downside, the price of war could be even higher,” OECD Chief Economist and Deputy Secretary-General Laurence Boone said in a statement.

“The conflict is disrupting the distribution of basic food and energy, fuelling higher inflation everywhere and threatening low-income countries in particular.”

So-called core PCE inflation, which strips out the categories of food and energy and is viewed as a better gauge of underlying price pressures, is expected to come in at 4.7 percent in the United States in 2022, the OECD said. This, too, is higher than earlier projections.

“Underlying inflationary pressures have also risen markedly as strong demand continues to run up against supply constraints, with price pressures having broadened from goods to services components.”

“As in other countries, energy and food prices have spiked, eroding the purchasing power of households” in the United States, the agency added.

Wages in the United States have grown at a slower pace than inflation each month since October 2021, government data show (pdf). That’s pushed inflation-adjusted real earnings into negative territory, effectively delivering a pay cut to many American households.

While the United States is rather well insulated from the war in Ukraine and sanctions on Russia, the OECD noted that there have been “material indirect effects” through global markets and greater reliance on some energy commodities such as uranium.

“Disruptions to key inputs for semiconductors and transport equipment produced in Ukraine and Russia (e.g. palladium, argon, neon) and lockdowns in China could also create supply disruptions that impact production in the United States,” the agency said.

“Supply disruptions may take some time to fully ease, especially given the impacts of the war in Ukraine and COVID-related lockdowns in China.”

The OECD’s downgrade of U.S. economic growth forecasts comes on the heels of the World Bank’s most recent economic outlook, which similarly slashed its expectations for U.S. GDP growth.

The World Bank downgraded the U.S. economic growth outlook for 2022 by 1.2 percentage points to 2.5 percent, relative to its January forecast, while the 2023 outlook was cut by 0.2 of a percentage point to 2.4 percent.

Both agencies cut their respective global economic growth forecasts, with the World Bank making a particularly stark warning that the world economy faces a mounting risk of stagflation—a toxic combination of high inflation and sluggish growth—and that many countries could end up in the grips of a recession.