Russia’s invasion of Ukraine immediately slowed the recovery from the COVID-19 pandemic and set the global economy on a course of lower growth and rising inflation.
The OECD’s latest Economic Outlook projects global growth to decelerate sharply to around 3% this year and 2.8% in 2023, well below the recovery projected in the previous Economic Outlook last December.
The economic and social impact of the war is strongest in Europe, with many of the countries hardest hit in Europe, given exposure through energy imports and refugee flows.
High inflation is eroding household incomes and spending, hitting vulnerable households particularly hard. The risk of a serious food crisis remains acute for the world’s poorest economies because of the high risk of supply shortages and elevated costs.
Further increases in food and energy prices and persisting supply-chain bottlenecks are key factors causing consumer price inflation to peak at higher levels and remaining high for longer than previously projected. In some advanced economies, inflation is now expected to reach levels not seen since the 1970s. Cost pressures should start to ease with the impact of rising interest rates beginning to be felt through 2023. However, core inflation is still projected to remain at or above central bank target ranges in many major economies.
“Countries worldwide are being hit by higher commodity prices, which add to inflationary pressures and curb real incomes and spending, dampening the recovery,” OECD Secretary-General Mathias Cormann said during the presentation of the Outlook. “This slowdown is directly attributable to Russia’s unprovoked and unjustifiable war of aggression, which is causing lower real incomes, lower growth and fewer job opportunities worldwide.” (Read the full speech).
Uncertainty around the outlook is high, marked by prominent downside risks. We don’t know how much longer Russia’s war against Ukraine will last and how much worse it may get.
Many low-income and emerging‑market economies will be challenged even more by rising food and energy prices, slower demand growth in their export markets, and the potential for capital outflows as interest rates rise in the advanced countries.
Furthermore, the pandemic is not over - more aggressive or contagious variants may emerge, and zero‑Covid policies in China may continue to disrupt supply chains.
“The Outlook is sobering, and the world is already paying the price for Russia’s aggression,” said Chief Economist Laurence Boone said. “The choices made by policymakers and citizens will be crucial to determining how high that price will be and how the burden will be shared. Famine is not a price the world should pay.”
Greater international cooperation is essential to help avoid a food crisis. Curbing export restrictions, which drive up global prices, boosting efforts to transport commodities out of Ukraine and targeted direct aid would help countries hit by the current disruptions.
Protecting low-income households from the costs of the war must be an urgent priority for governments. However, the best policy option to provide such support to cushion the impact of higher prices is through temporary, well-targeted, means-tested fiscal measures.
In most economies with healthy growth and employment, the level of inflation no longer warrants an accommodative monetary policy stance. The more widespread and entrenched inflation has become, the faster the removal should be. Further policy rate increases will likely be needed in many emerging-market economies, to help anchor inflation expectations and avoid destabilising capital outflows.
The war has again underscored the importance of energy security. Accelerating the green energy transition would both improve energy security and help lower carbon emissions. Regulatory and fiscal incentives can stimulate movement towards alternative energy sources, but large-scale renewable energy investments will require copper, rare earths and other materials that are concentrated in a few countries. Open international trade is therefore essential to achieve the transition and energy security.
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