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Russia’s invasion of Ukraine is a major humanitarian and economic shock that is set to derail the global recovery from the Covid-19 pandemic, the Organisation for Economic Co-operation and Development said.
The “severe economic shock will be of “uncertain duration and magnitude”, the Paris-based organisation said, with a twin growth and inflation blow causing the think tank to slash its global growth outlook and raise its inflation forecast.
The OECD, which has 38 developed country members, expects growth of just under 3 per cent in 2022, down more than 1 per cent from its earlier projection of 4.5 per cent, with the war causing “numerous significant economic implications”.
Meanwhile, inflation will rise to about 7.5 per cent, the organisation said, as the soaring cost of energy and food feeds into the economy — a significant uplift on its December cost-of-living expectation of 5 per cent.
Mathias Cormann, Secretary General of the OECD, said the uncertainty the war poses to global growth means the organisation cannot present its usual economic outlook.
“This crisis calls for sensible, well targeted, temporary short-term measures while staying focused on long-term objectives, ensuring the resilience of our global supply chains, ensuring energy, food and digital security, and staying the course on our climate objectives,” he said.
“This is unlikely to be a short-term challenge. We need to prepare ourselves to sustain that humanitarian support to a significantly higher number of people.”
The commodity supply squeeze resulting from the conflict is “exacerbating supply chain disruptions brought on by the pandemic and risks weighing on consumers and firms for a long time”, Mr Cormann added.
Before the outbreak of the war, most key global macroeconomic variables were expected to return to normal over the course of this year and next.
Global growth was on track to return to pre-pandemic rates in 2023 with most OECD nations hitting full employment, inflation converging on levels close to policy objectives and monetary and fiscal policy settings normalising.
However, that has changed, because although Russia and Ukraine are relatively small in output terms, they are large producers and exporters of key food items, minerals and energy.
“The war has already resulted in sizeable economic and financial shocks, particularly in commodity markets, with the prices of oil, gas and wheat soaring,” the group said.
To help mitigate this, global central banks should focus on fighting inflation and leaving governments to respond with spending to cushion economies from the impact of the war in Ukraine.
This could reduce the negative impact on growth with only a minor extra impetus to inflation.
“In some countries, this could be funded by taxation of windfall gains,” the OECD said.
In terms of the policy and market response, Mr Cormann said the key messages are “that we need to remain cool headed, we need both sensible and pragmatic near-term and sensible longer term actions".
With economies facing a rocky road ahead, monetary policy should remain focused on ensuring well-anchored inflation expectations.
“Most central banks should continue their pre-war plans, with the exception of the most affected economies, where a pause may be needed to fully assess the consequences of the crisis,” the think tank said.
The impact of the war, “if sustained”, would produce “a deep recession in Russia”, the OECD said.
While together Ukraine and Russia represent less than 3 per cent of global trade, said Mr Cormann, and hold less than 2 per cent of the total global foreign direct investment stock, some countries are more exposed than others to the fallout from the war.
The pain would be felt most in Europe, with growth hit by up to 1.4 percentage points in the eurozone as OECD simulations show euro-area growth is most at risk,
Many European governments have already taken action that chimes with its fiscal recommendations, introducing targeted support for firms and households hit by the surge in energy prices.
“We do not yet know how this will fully play out but we do know this will hurt the global recovery and push inflation even higher,” OECD chief economist and Deputy Secretary-General Laurence Boone said. “Government policy has a crucial role to play in re-establishing some of the certainty and security we have lost.”
In the near term, the OECD said many governments will need to cushion the blow of higher energy prices, diversify energy sources and increase efficiency wherever possible.
“For food, higher production in OECD countries, refraining from protectionism and multilateral support for logistics will help the countries most affected by a disruption to supply from Russia and Ukraine,” it said.
“The war has underlined the importance of minimising dependence on Russia for key energy imports.”
It also warned against the risk of a “sharp increase in poverty and hunger”, particularly in developing economies, were supplies of wheat from Russia and Ukraine to be cut off completely, and of the rising cost of supporting refugees fleeing the conflict.
About 3 million people have fled Ukraine with more waves of refugees expected in the weeks ahead.