Higher inflation and slower growth are the heavy price that the global economy is paying for Russia’s war in Ukraine, the Organization for Economic Cooperation and Development said on Tuesday.
Record inflation, fueled by the largest energy crisis since the 1970s, is creating financial hardship for millions, the Paris-based organization said in a new report. Governments and policymakers must make it their top priority to bring inflation down, while shielding households and businesses with targeted spending, the O.E.C.D. added.
“Navigating the economy from the current situation to a sustainable recovery will be challenging,” Mathias Cormann, the secretary-general of the O.E.C.D., said in a news briefing. “Risks remain tilted to the downside, and economic activity may turn out even weaker if energy prices rise further or if energy disruptions affect gas and electricity markets in Europe and Asia,” he said.
“An end to the war and a just peace for Ukraine would be the most impactful way to affect the economic outlook,” Mr. Cormann added. “But until this happens governments should deploy measures for a stronger and sustainable recovery.”
The global economy won’t tumble into an outright recession. But global growth will decline to 2.2 percent in 2023 from 3.1 percent this year, before rebounding to a 2.7 percent pace in 2024, the report forecast. Inflation in most of the world’s developed and developing economies will cool slightly, to 6.4 percent next year from a blistering 9.4 percent rate in 2022, but continue doing economic damage.
The whirlwind of problems — high energy and food costs, rising interest rates and growing government debt to pay for the fallout — will take the biggest toll on Europe, North America and South America next year, with those regions expected to face painful economic slowdowns and stubbornly high prices, the O.E.C.D. said.
The economies of both the United States and Europe are forecast to expand at an anemic pace of just 0.5 percent next year.
China’s economy is likely to expand by 4.6 percent in 2023, following a pandemic-induced slowdown this year that has slashed its growth rate by more than half.
Efforts by central banks to contain runaway inflation are starting to pay off in some countries, the group said. In Brazil, where the central bank moved swiftly with a series of rate hikes, inflation has started to come down in recent months. In the United States, where the Federal Reserve had unleashed its biggest rate hikes in decades, the latest data suggest some progress is being made in the fight against inflation.
Even so, monetary policy should continue to tighten in the countries where inflation remains high and broad-based, the O.E.C.D. said.
Europe, which is grappling with a war on its border, is likely to have a harder time reining in inflation, mainly because governments are making a tremendous pivot away from relatively cheap Russian gas and oil that will likely take several years to bear out.
Politicians have been spending with abandon to shield households and businesses from the scourge of high energy high energy and food prices, including price caps, price and income subsidies and reduced taxes. Overall, countries are now spending nearly a fifth of their economic output on energy, up from around a tenth in recent years.
But some of those policies risk adding to inflationary pressures, by encouraging more spending and providing less of an incentive to save on energy, the O.E.C.D. said. “Since energy prices are likely to remain high and volatile for some time, untargeted measures to keep prices down will become increasingly unaffordable, and could discourage the needed energy savings,” it said.