Dhe OECD has downgraded its forecast for global economic growth significantly due to the war in Ukraine. Instead of the previous 4.5 percent, growth of only 3 percent is now expected for the current year, the industrialized nations organization announced on Wednesday in Paris. The OECD follows the World Bank, which had already slashed its growth outlook for the global economy on Tuesday.
The World Bank lowered its forecast for global economic growth this year from 4.1 to 2.9 percent. Russia’s invasion of Ukraine has exacerbated the economic damage from the corona pandemic, which is why many countries have to expect a recession, she said. The OECD has also become more pessimistic for the coming year: for 2023 it expects growth of 2.8 percent instead of the previously forecast of 3.2 percent.
stagflation on the horizon
As a result of the war, inflation will also be higher and last longer than previously assumed, said OECD Secretary General Mathias Cormann. Together with declining growth, this results in a toxic cocktail: as soon as the global economy stops growing due to high inflation and instead slips into recession, economists speak of stagflation. The problem with this: In order to combat high inflation, central banks usually have to raise interest rates, which chokes off emerging economic growth. It is therefore very difficult to get out of such a situation.
“The risk of stagflation is significant, with potentially destabilizing consequences for low- and middle-income economies,” said World Bank President David Malpass. “For many countries it will be difficult to avoid a recession.” Weak economic growth with rising prices could cause great suffering in many developing countries.
The last time stagflation occurred was in the 1970s. The World Bank referred to this in its January report. There are clear parallels between then and now, it said. These include supply-side disruptions, the prospects for slowing growth and the vulnerability of emerging markets to the monetary tightening that will be needed to contain inflation.
OECD: German economy grows by 1.9 percent
However, there are also a number of differences, such as the strength of the dollar, generally lower oil prices and the broadly sound balance sheets of the major financial institutions, which offer room for manoeuvre. To reduce the risk of history repeating itself, the World Bank has urged policymakers to coordinate aid to Ukraine, curb rising oil and food prices and set up debt relief for developing countries.
The World Bank, for its part, announced an additional $1.5 billion (€1.4 billion) in aid to Ukraine. The new funds would be used to pay wages for government employees and social workers, she said. The organization advertises to donor countries and uses the “flexibility of our various financing instruments to enable Ukrainians to access health services, education and social protection”. Altogether, the aid from the World Bank has now totaled more than four billion dollars.
For Germany, the OECD predicts economic growth of 1.9 percent for 2022 and 1.7 percent for 2023. The war and oil embargo against Russia hampered the recovery. The increase in inflation is weakening purchasing power, which is dampening the revival in private consumption. The increased uncertainty, the sharp rise in energy prices and new material shortages impacted a number of sectors, as well as private investment and exports. The OECD advises that subsidy programs to cushion rising energy and food prices must be targeted precisely at needy households and companies.