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 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 Paris-based 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 grim assessment echoed a warning by the International Monetary Fund last month that world economy was headed for “stormy waters.” The fund downgraded its global growth projections for next year and warned of a harsh worldwide recession if policymakers mishandled the fight against inflation.
“The worst is yet to come, and for many people 2023 will feel like a recession,” the I.M.F. report said.
The O.E.C.D said that the fallout from Russia’s war had substantially reversed economic gains that countries had started to make following the end of pandemic lockdowns last year, when the global economy expanded by 5.9 percent.
The world won’t tumble into an outright recession, the report said, but the whirlwind of problems — high energy and food costs, rising interest rates and growing government debt to pay for the fallout — had created fragile prospects for the global economy over the next two years. Global growth will slow to a 2.2 percent pace in 2023 from 3.1 percent this year, before rebounding modestly in 2024, the report said.
The impact will be unbalanced, with the biggest toll coming in Europe and North America, two regions expected to face painful slowdowns and a continued high cost of living and doing business. The economies of both the United States and the euro area are forecast to expand at an anemic pace of just 0.5 percent next year before recovering modestly in 2024.
Britain, by contrast, will suffer from a lengthy recession, with the economy shrinking by 0.4 percent next year before limping into a shallow recovery in 2024. The country, which the O.E.C.D. forecast to grow 4.4 percent this year, has stumbled badly after months of political upheaval and a sweeping series of unfunded tax cuts in September that caused the British pound to plunge and eventually led to the resignation of Liz Truss as prime minister.
The current government, led by Rishi Sunak, unveiled a much-anticipated budget proposal last week seeking to repair the damage. But rising living costs will continue to weigh on economic growth, the O.E.C.D. said.
Growth in 2023 will be strongly dependent on major Asian emerging market economies, which will account for close to three-quarters of global growth next year, the organization added. 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, while India will grow at a robust 5.7 percent pace.
More pernicious than slowing growth is the stubborn scourge of inflation, which has been driven higher by a surge in energy prices and is likely to continue to squeeze households and businesses for the foreseeable future. But the group said inflation in most of the world’s developed and developing economies would cool slightly next year, to 6.4 percent from a blistering 9.4 percent rate in 2022, the group said.
Efforts by central banks to contain runaway inflation are starting to pay off in some countries, the O.E.C.D. said. In Brazil, where the central bank moved swiftly with a series of rate increases, inflation has started to come down in recent months. In the United States, where the Federal Reserve had unleashed its biggest rate increases 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.
As Europe continues to confront a war on its border, policymakers are 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 is likely to take several years to bear out.
Politicians have been spending with abandon to shield households and businesses from high energy and food prices, using price caps, 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, Álvaro Santos Pereira, the group’s acting chief economist, said at the briefing.
But some of those policies risk adding to inflationary pressures, by encouraging more spending and providing less of an incentive cut back on energy use, Mr. Pereira 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,” he said.
Even so, high prices are continuing to eat away at people’s savings and paychecks, causing real wages to fall in many countries and slashing purchasing power. In Britain, for example, growth in average total pay picked up to 6 percent in the three months to September, the O.E.C.D. noted, but because of inflation, but real wages actually fell by 2.6 percent.
With inflation expected to remain quite high over at least the next year, the group added, wage demands by workers in many countries will probably become much higher.
The cost of living crisis “is hurting people everywhere,” the O.E.C.D. report said. “If inflation is not contained, these problems will only become worse. Thus, fighting inflation has to be our top policy priority right now.”