OECD Warns of Tougher Times than Forecast

The global economy could take a bigger hit than previously forecast next year due to the effects of Russia’s war in Ukraine. In a report, whose title itself provides a bleak outlook, the OECD says that the conflict has further aggravated inflationary pressure when the cost of living was already rising quickly.

In the report titled “Paying the Price of War”, the Paris-based organization says, Covid outbreaks are still having an impact on the global economy while growth has also been affected by rising interest rates as central banks scramble to cool red-hot prices. 

“The world is paying a very heavy price for Russia’s aggression against Ukraine,” OECD Secretary-General Mathias Cormann said last night, adding that “households and firms are suffering as costs rise and purchasing power is taking a hit.”

Things could take a turn for the worse

“A number of indicators have taken a turn for the worse, and the global growth outlook has darkened,” the OECD has said, adding that global growth stalled in the second quarter of this year and data in many economies “now point to an extended period of subdued growth.  

The OECD slashed its 2023 growth forecast for the global economy to 2.2 percent, down from 2.8 percent in its previous estimate in June. “The central scenario is not a global recession, but risks have increased in the past few months,” according to OECD’s interim chief economist Alvaro Pereira.

To highlight the impact of Russia’s invasion of Ukraine, the OECD said global output in 2023 is now projected to be $2.8 trillion lower than previously estimated before the conflict in December 2021. “This is the size of the French economy,” Pereira said, adding that the outlook for nearly all nations in the Group of 20 top economies was cut, except for Turkey, Indonesia and Britain, though the latter is forecast to have zero growth.

Both the US and China will slowdown

Growth in the United States — the world’s biggest economy — is forecast to slow to 0.5 percent in 2023, while the forecast for China, whose economy has been hit by strict Covid lockdowns, was cut sharply for this year to 3.2 percent while it was slightly lower to 4.7 percent for 2023.

Germany is now expected to go into recession next year with Europe’s biggest economy now seen shrinking by 0.7 percent — a 2.4-percentage-point drop from the previous forecast. The country’s economy has been hit the hardest in Europe as it has relied heavily on Russian supplies of natural gas, which Moscow has cut significantly in suspected retaliation to Western sanctions.

The eurozone as a whole will post meagre growth of 0.3 percent, a sharp downgrade from 1.6 percent. The OECD kept its 2022 global growth forecast unchanged at three percent after previously lowering it.

Energy and food prices are facing pressure

The war has sent energy and food prices soaring over concerns about supply as Russia is a major oil and gas producer while Ukraine is a key exporter of grains to countries across the world. Inflation had already been on the rise before the conflict due to bottlenecks in the global supply chain after countries emerged from Covid lockdowns.

“Inflationary pressures have become increasingly broad-based, with higher energy, transportation and other costs being passed through into prices,” the OECD said, while raising its inflation forecast for the G20 to 8.2 percent for 2022 and 6.6 percent for next year.

Governments have announced emergency measures to help households and businesses cope with the soaring cost of living. But the measures “have been poorly targeted”, the OECD said.

Central banks, meanwhile, have ramped up interest rates, a move necessary to tame inflation but that can also push economies into recession.The monetary tightening is a “key factor slowing global growth”, the OECD said, while warning of “significant uncertainty surrounds the projections” for the global economy.