OECD slashes growth outlook, but sees limited stagflation risk

Says world economy to grow 3% this year, much less than the 4.5% expected earlier

The war in Ukraine has made the growth outlook far bleaker even though the global economy should avoid a bout of 1970s-style stagflation, the OECD said on Wednesday, slashing its growth forecasts and jacking up its inflation estimates.
 

The world economy is set to grow 3 per cent this year, much less than the 4.5 per cent expected when the Organisation for Economic Cooperation and Development last updated its forecasts in December.
 

Growth will then slow further next year, easing to 2.8 per cent, down from a previous forecast of 3.2 per cent, the Paris-based policy forum said in its latest Economic Outlook. “Russia’s war is indeed posing a heavy price on the global economy,” OECD Secretary General Mathias Cormann told a news conference.
 

“Global growth will be substantially lower with higher and more persistent inflation,” he said, adding the OECD was not forecasting recession although there were numerous downside risks to the outlook.
 

Meanwhile, any quick relief from soaring costs is unlikely, with inflation expected to peak at 8.5 per cent this year in OECD countries before slipping to 6 per cent in 2023. Previously the OECD had expected inflation to peak at 5 per cent before receding to 3 per cent in 2023.
 

Despite the lower growth and higher inflation outlook, the OECD saw a limited risk of “stagflation” like that seen the mid-1970s, when the oil price shock triggered runaway inflation and surging unemployment.
 

In particular, developed economies are much more driven by services and less energy-intensive than in the 1970s and central banks have a freer hand to fight inflation, independent of governments more concerned about unemployment.

A Gloomy Scenario

Worries 

Europe is one of the regions most at risk should the war in Ukraine drag on

Low-income economies are also at risk due to surging prices of basic food and energy

Sharp increases in rates could slow growth more than expected

China’s Covid Zero policy continues to weigh on the global outlook

Suggestions

More aid and global cooperation on logistics to avert a food crisis

Targeted govt support for households hardest hit by rising cost of living

Signals from central banks they won’t allow inflation to spread

US monetary policy can tighten faster as prices driven by over-buoyant demand