Russia’s war of aggression against Ukraine continues to overshadow the world economy. Despite recent signs of improvement, recovery over the next two years is expected to be moderate. The outlook remains fragile and downside risks predominate. High uncertainty generated by the war could take a heavy toll on activity. Trade tensions are high and could worsen. Concerns about financial vulnerabilities have risen, including in financial institutions, housing markets and low-income countries. While headline inflation has started declining, it remains elevated and could persist longer.
Global growth slowed in 2022 to 3.2%, more than 1 percentage point weaker than expected at the end of 2021, mainly weighed down by Russia’s war of aggression in Ukraine and the associated cost-of-living crisis in many countries. Growth is projected to remain at below-trend rates in 2023 and 2024.
A key factor in the improvement in activity and sentiment in early 2023 was the recent decline in energy and food prices. While levels are still relatively high compared to pre-war, this is boosting purchasing power for most firms and households and is helping to lower headline inflation. The earlier-than-expected re-opening in China is also expected to have a positive impact on global activity, reducing supply chain pressures and giving a boost to international tourism.
Headline inflation has begun to decline mainly due to the easing of energy and food prices. The decline in energy prices partly reflects the impact of a warm winter in Europe, which helped to preserve gas storage levels, as well as lower energy consumption in many countries.
Goods price inflation has started declining in most countries, due to the gradual return of normal demand for goods post-pandemic and the easing of global supply chain bottlenecks. Core inflation (excluding food and energy) continues to be driven by strong service price increases and cost pressures from tight labour markets.
Short-term economic prospects have improved, helped by lower commodity prices and the reopening of China, with global growth set to pick up moderately and inflation declining gradually. However, downside risks predominate.
The Interim Report highlights that the recovery remains fragile, with key risks stemming from uncertainty about the war in Ukraine and energy market developments, and significant financial vulnerabilities. Well-designed policy measures are required to reduce inflation pressures, ensure better-targeting of fiscal policy support, and revive sustainable growth. The Interim Report is an update on the assessment in the November 2022 issue of the OECD Economic Outlook (Number 112).