The world is paying a “hefty price” for Russia’s war against Ukraine through weaker growth, higher inflation and potentially long-lasting damage to supply chains, the Organisation for Economic Co-operation and Development (OECD) has said.
The gloomy assessment, which mirrors one delivered by the World Bank on Tuesday, suggests the economic fallout from Russia’s invasion could be more damaging than initially thought and harder to set right through fiscal and monetary policies.
It detailed a long list of risks ranging from an abrupt Europe-wide energy interruption if Russia cuts gas flows in response to sanctions to further increases in commodity prices and/or stronger disruptions to global supply chains.
The Paris-based think tank slashed its outlook for global growth this year to 3 per cent, from 4.5 per cent previously, and doubled its inflation projection to nearly 9 per cent for its 38 member countries.
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When combined with China’s zero-Covid policy, it said the war has set the global economy on a course of slower growth and rising inflation, similar to the stagflation era of the 1970s.
It predicted inflation in the euro zone would average 7 per cent this year, more than three times the European Central Bank’s target rate, while noting many of the hardest-hit countries are in Europe, which, it said, was highly exposed to the war through energy imports and refugee flows.
The OECD said Ireland would grow in GDP terms by 4.8 per cent this year, compared to a rate of 13.5 per cent last year, and by 2.7 per cent next year.
Surging inflationary pressures in the Irish economy, caused by disruptions in global supply chains and geopolitical concerns, will cut households’ real income and dampen consumption growth, it said.
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It said additional fiscal measures deployed by the Irish Government “should better target poorer households, particularly in the event of further food price increases”.
The war had increased the risk of a food crisis, the OECD said, noting Russia and Ukraine accounted for about 30 per cent of global wheat exports, 20 per cent for corn, mineral fertilisers and natural gas, and 11 per cent for oil.
“Without action there is high risk of a food crisis. Supply disruptions are rising, particularly threatening low-income countries that are highly dependent on Russia and Ukraine for basic food staples,” it said.
The early effects of surging prices had also forced central banks to tighten monetary policy, with the US Federal Reserve, for example, having just raised interest rates at a quickened pace of 50 basis points last month. Meanwhile governments are rethinking spending plans as they attempt to shelter households, it said.
“Central banks will have to conduct a delicate balancing act between keeping inflation under control and maintaining the post-pandemic economic rebound, especially where the recovery is not yet complete,” the OECD said.
Chief economist Laurence Boone, speaking to reporters in Paris, said that disruption to the global economy could leave a lasting impact on investment.
“We had a series of shocks, first the pandemic, then the war, and in some countries the supply side of the economy has not fully recovered,” she said. “The longer this lasts, the longer global supply chains are disrupted and the less there would be appetite for investment.
