The 'darkened' outlook weighs on global economy as war in Ukraine persists: OECD report
(Kitco News) With the third quarter of the year wrapping up this week, the economic outlook has darkened as indicators have turned for the worst, according to the OECD's latest report.
The world is paying a "high price" for Russia's war in Ukraine. The top risks are energy and inflation crises. And they could trigger a recession in major economies, said the Organisation for Economic Cooperation and Development (OECD) Monday.
"The global economy has lost momentum in the wake of Russia's unprovoked, unjustifiable and illegal war of aggression against Ukraine. GDP growth has stalled in many economies and economic indicators point to an extended slowdown," OECD Secretary-General Mathias Cormann said in a press release.
Inflation was already a problem when the world emerged after the COVID-19 pandemic, but the war in Ukraine has "severely aggravated" price pressures.
"With the impacts of the COVID-19 pandemic still lingering, the war is dragging down growth and putting additional upward pressure on prices, above all for food and energy. Global GDP stagnated in the second quarter of 2022 and output declined in the G20 economies," the OECD said in its Interim Economic Outlook report. "With recent indicators taking a turn for the worse, the global economic outlook has darkened."
The latest forecast sees the global economy growing just 2.2% in 2023, with the GDP estimates for most of the G-20 countries revised down.
Europe will be hit the most in the coming year. Germany is anticipated to see a contraction in growth of 0.7% in 2023.
"The shocks could reduce growth in the European economies by over 1¼ percentage point in 2023, relative to baseline, and raise inflation by over 1½ percentage point," the report noted. "This would push many countries into a full-year recession in 2023."
The big concern for Europe is gas shortages, especially ahead of a difficult winter. "EU gas storage levels have been raised considerably through the course of this year, and are now between 80-90% on average in most member states," the OECD said. "Even at this level, there may not be sufficient storage to ensure that demand in a typical winter can be met without storage levels in the European gas market being pushed below effective operational levels."
The OECD also highlighted a "significant uncertainty" surrounding its own projections, noting "significant downside risks."
"These include the possibility of further food and energy price spikes, which could push many people into poverty, as well as the possibility of gas shortages as winter progresses in the Northern hemisphere," the report said. "Reducing energy consumption and diversifying supply sources will be critical to avoid shortages, which would push global energy prices up, damage confidence, and likely worsen financial conditions and require a temporary period of enforced reduction of gas use by businesses."
Synchronized rate hikes by the world's central banks have not been enough, the OECD said, adding that more are needed to get inflation under control.
"Inflation has become broad-based in many economies," the report said. "Further interest-rate increases are needed in most major economies to anchor inflation expectations and ensure that inflation pressures are reduced durably."
The OECD sees growth in China slowing to 3.2% in 2022 and then rising to 4.7% in 2023. The U.S. economy will grow 1.5% this year and only 0.5% next year.
Global food security is another major risk, and it requires international cooperation to ensure agricultural markets remain operational. "The fallout from the war remains a threat to global food security, particularly if combined with further extreme weather events resulting from climate change," the report said.