The world economy is slowing down at a faster pace than expected as a result of the consequences of Russia’s war against Ukraine, the Organisation for Economic Cooperation and Development, or OECD, said on Monday. Further interest rate increases are needed in most major economies to halt inflation, it said.
Under the title “Paying the Price of War”, the OECD said that global economic growth stalled in the second quarter of 2022, and indicators in many economies now point to an extended period of subdued growth. The war has pushed up energy and food prices substantially, aggravating inflationary pressures at a time when the cost of living was already rising rapidly around the world.
“The global economy has lost momentum in the wake of Russia’s unprovoked, unjustifiable and illegal war of aggression against Ukraine,” said OECD secretary-general Mathias Cormann in a statement. “GDP growth has stalled in many economies and economic indicators point to an extended slowdown.”
Global growth now is projected to slow to 2.25 per cent in 2023 from 3 per cent in 2022, well below the pace foreseen prior to the war, the OECD projected in its latest report. Annual GDP growth is projected to slow sharply to 0.5 per cent in the United States in 2023, and 0.25 per cent in the euro area, with risks of output declines in several European economies during the winter months. Growth in China is projected to drop to 3.2 per cent this year, amidst COVID-19 shutdowns and property market weakness, but policy support could help growth recover in 2023.
Inflation now broad-based
Inflation has become broad-based in many economies. Tighter monetary policy and easing supply bottlenecks should moderate inflation pressures next year, but elevated energy prices and higher labour costs are likely to slow the pace of decline. Headline inflation is projected to ease to 6.5 per cent next year from 8.2 per cent in 2022, and decline to 4 per cent in 2023 from 6.2 per cent this year in the G20 advanced economies.
Significant uncertainty surrounds the projections, the OECD said. More severe fuel shortages, especially for gas, could reduce growth in Europe by a further 1.25 percentage points in 2023, with global growth lowered by 0.5 percentage point, and raise European inflation by over 1.5 percentage points.
‘All margins of flexibility’
Further interest rate increases are needed in most major economies to anchor inflation expectations and ensure that inflation pressures are reduced durably. Policy interest rates are projected to rise to 4.5-4.75 per cent in the United States, 4.5 per cent in Canada, and 4.5 per cent in the United Kingdom in 2023, reflecting the visible labour market pressures in these countries.
In the euro area, the ECB is facing a “challenging environment given the very uncertain outlook but increasingly widespread inflationary pressures”, the OECD said. The main refinancing rate is projected to rise to 4 percent in 2023, with use being made of “all margins of flexibility” when reinvesting the proceeds of maturing bonds on the ECB balance sheet to limit financial fragmentation in the euro area.
Tightening needed
Fiscal support is needed to help cushion the impact of high energy costs on households and companies. However, the OECD said these measures should be temporary, concentrated on the most vulnerable, preserve incentives to reduce energy consumption and be withdrawn as energy price pressures wane.
Goals require alignment
Governments need to ensure that the goals of energy security and climate change mitigation are aligned, it said. Efforts to ensure near-term energy security and affordability through fiscal support, supply diversification and lower energy consumption should be accompanied by stronger policy measures to enhance investment in clean technologies and energy efficiency.
The fallout from the war remains a threat to global food security, particularly if combined with further extreme weather events resulting from climate change, the OECD said. International cooperation is needed to keep agricultural markets open, address emergency needs and strengthen supply.