Shock of War Threatens Lasting Impact on Global Economy

The world economy will pay a “hefty price” for the war in Ukraine encompassing weaker growth, stronger inflation and potentially long-lasting damage to supply chains, the Organisation for Economic Co-operation and Development (OECD) said.

This organization reduced its forecast for global growth to 3.5% from December’s 4.5%. It also doubled its inflation projection to close to 9.0% for 38 of its member countries according to Parisian forecasts. It expects that growth will slow to 2.8% in 2023.

The price of war could be “even higher,” it warned, describing a long list of risks ranging from an abrupt cut-off of Russian supply in Europe to vulnerabilities on financial markets from high debt and elevated asset prices.

“There have been several significant changes in the global economic environment in recent months, including the worldwide spread of the Omicron variant of Covid and the greater-than-expected persistence of inflationary pressures,” the organization said in its economic outlook. “The single greatest change, however, is the economic impact of the war in Ukraine.”

The gloomy assessment, which echoes a similar warning from the World Bank, indicates a deeper and broader economic fallout from Russia’s invasion that will make it harder to set the right fiscal and monetary policies. This is the first detailed view from the OECD, which didn’t issue full forecasts in April because of the prevailing uncertainty.

Early effects of surging inflation have already compelled central banks to tighten their monetary policies. For example, the US Federal Reserve just increased its interest rate by 50 basis point last month. As they try to protect households, governments are reviewing their spending plans.

While the OECD said it’s warranted for all monetary authorities to pare back stimulus, it urged caution particularly in the euro area, where surging prices mainly reflect supply pressures.

“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 organization said.

Laurence Boone is the Chief Economist and spoke in Paris to reporters about how disruptions to global economies could impact 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.”

The OECD noted that rising inflation is affecting consumer spending and reducing living standards across the globe. Businesses are less confident about future production. Crucially, that hit to confidence is deterring investment, which in turn threatens to hurt supply “for years to come,” it said.

However, the organisation is still cautious as to whether the global economy may be on the verge of collapse despite similarities with the oil shocks of the 1970s.

According to it, the major economies of today are much less energy-intensive than they were at that time. Central banks also have better frameworks and more independence. Consumers have an excess amount of savings left over from the Covid pandemic.

“Nonetheless, there are clear risks that growth could slow more sharply than expected and inflationary pressures could intensify further,” the OECD said.

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