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OECD: the heavy global price of Russia’s war against Ukraine

Author: ICAEW Insights

Published: 20 Jun 2022

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 has significantly downgraded its forecasts for global growth to around 3% this year and 2.8% in 2023, according to its latest Economic Outlook, after warning that the economic and social impact of the war in Ukraine is strongest in Europe due to energy imports and refugee flows. 

The OECD growth projections suggest the UK will not grow at all in 2023 – the only G20 country with a lower growth projection for 2023 is Russia at -4.1%, which has been hit with a raft of sanctions due to the war in Ukraine.

Ian Stewart, Deloitte’s Chief Economist in the UK, said that instead of roaring growth in the 2020s, global activity is spluttering, with the OECD and the World Bank warning of the growing risks of recession.

“Among rich countries the UK’s situation is especially challenging,” said Stewart. “The OECD thinks UK growth will flatline next year, with only Russia seeing a worse performance among the group of 20 leading economies.”

In the previous Economic Outlook last December, the OECD projected that global growth would “move along at the brisk pace of 4.5% in 2022”.

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, according to the OECD report.

Higher commodity prices and supply-chain bottlenecks

Further increases in food and energy prices and persistent supply-chain bottlenecks are key factors causing consumer price inflation to peak and remain at higher levels for longer than previously projected. In some advanced economies, inflation is now expected to reach levels not seen since the 1970s.

Although cost pressures should start to ease as the impact of rising interest rates is felt through 2023, 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. “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.”

Uncertainty around the outlook is high due to multiple variables such as the ongoing impact of the pandemic and how long Russia’s war against Ukraine will last, marked by prominent downside risks. 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 more advanced economies. 

We’re not out of the pandemic yet

The OECD also warns that the pandemic is far from over, with the risk of more aggressive or more contagious variants combined with zero-COVID policies in China offering the potential for further supply-chain disruption.

“The outlook is sobering, and the world is already paying the price for Russia’s aggression,” said OECD Chief Economist Laurence Boone. “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.

The OECD says an urgent priority for governments is to protect low-income households from the costs of the war. It says temporary, well-targeted, means-tested fiscal measures are the best policy option to cushion the impact of higher prices.

In most economies with healthy growth and employment, the level of inflation no longer warrants an accommodative monetary policy stance, for example, the central bank cutting rates to inject money into the financial system. 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. 

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.

“The risks are in plain sight. Inflation is eating into consumer spending power at a speed that has not been seen in decades. Weaker demand, higher interest rates, corporate cost-cutting and uncertainty inhibit growth. By undermining investment, and the ‘animal spirits’ of the business sector, a weak economy depresses productivity and future growth,” Stewart added.

Download the full OECD Economic Outlook report

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