War in Ukraine set to lower global economic growth and further exacerbate inflation, OECD warns

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The war in Ukraine will deal a double punch to the global economy in 2022, slicing growth and driving already elevated consumer prices even higher, according to a new assessment from a key international economic watchdog.

The shock from Russia’s invasion of Ukraine last month, which sent the prices of energy, food and other commodities soaring and sparked a massive refugee crisis in Europe, will reduce global gross domestic product by more than 1 per cent this year, according to the Organization for Economic Co-operation and Development.

Growth in the European Union will be hardest hit, with a decline of 1.5 per cent in GDP, while the United States is expected to fare better, with an impact of around 0.8 per cent, the organization’s chief economist, Laurence Boone, told The Globe and Mail.

Meanwhile, the OECD warned the crisis will drive overall inflation up by nearly 2.5 percentage points, with prices climbing two percentage points in the Euro area and by just under 1.5 percentage points in the United States.

While the assessment, which Ms. Boone was set to deliver on Thursday morning in Paris alongside OECD Secretary-General Mathias Cormann, doesn’t include figures for Canada, she said Canada’s resource economy provides a natural buffer to the war. She expects the impact on Canada to be slightly less than what the U.S. economy experiences.

“Canada is an energy net exporting country and a wheat exporter, so for Canada, the effect is similar or more muted than the U.S.,” she said. “But the oil price increase affects everybody, including low-income people in Canada.”

The OECD assessment focuses on three crises brought on by the war, and what governments can do to alleviate the pain: the mass exodus of Ukrainians to safety in other parts of Europe, the surge in prices for cereals like wheat and corn, and soaring oil and gas prices.

Since the war began, more than three million refugees have left Ukraine, with most settling in nearby countries. The OECD is calling on other European nations to help with the costs.

“There is a moral obligation to take care of them, provide medical care, schooling for the kids, accommodation, and this requires money,” she said. “Poland and other neighbouring countries are taking a disproportionate number of refugees, so there should be burden sharing on the funding from the EU.”

The war has also disrupted exports of wheat from Ukraine and Russia, which account for 30 per cent of world exports. According to the OECD analysis, wheat prices have nearly doubled from their average in January, 2022.

Meanwhile, Russia is one of the world’s largest exporters of fertilizer, and disruptions have sent fertilizer prices skyrocketing by nearly 80 per cent over the same time period.

Several countries in Africa depend heavily on Russia and Ukraine for food, and Ms. Boone called on governments in other cereal-producing nations, such as Canada, to boost production.

“When we’re talking about increasing production, it would be helpful if Canada can do that, and help with the logistics so that cereals reach the people who need it most,” she said.

She also warned against a nascent rise in countries banning their own food exports in an effort to protect domestic supplies, something Egypt, Lebanon, Indonesia and others have done. So far, no EU countries have banned food exports.

“We need the food and agriculture trade to flow so that it gets to the people who need it,” she said. “We cannot repeat the mistake of the COVID-19 crisis, when countries put up barriers to exports of medical supplies.”

On the energy front, she called on governments to use “targeted and temporary” spending on income and price supports that help low-income households most impacted by high energy prices in a fiscally sustainable way.

The OECD is also backing a push by countries in Western Europe to dramatically scale back their reliance on Russia for oil and gas. Europe depends on Russia for 40 per cent of its natural gas.

“The solution is to increase energy security and resilience and that should be the prime objective of our governments now, by moving away from dependency on Russian energy and moving away from fossil-fuel dependency,” she said.

While Russia’s economy has been decimated by retaliatory sanctions put in place by Western governments, global financial markets have remained relatively calm, with the S&P 500 benchmark stock index sitting roughly where it was before the Russian assault began.

That should give central banks like the Bank of Canada and the U.S. Federal Reserve room to continue normalizing monetary policy after an era of unprecedented easing brought on by the COVID-19 pandemic.

“Where there’s strong economic growth, low unemployment and broad-based inflation, that makes sense,” she said, although “central banks should stand ready in case something happens.”

On Wednesday, the Fed raised rates for the first time since 2018, hiking by a quarter percentage point. The Fed said in a statement that Russia’s invasion had not only caused “tremendous human and economic hardship,” it is “likely to create additional upward pressure on inflation and weigh on economic activity.”

Aside from the immediate hit to global GDP, Russia’s invasion is likely to cause a broader rethink of what globalization will look like in the future, Ms. Boone said. While reduced trade barriers and greater economic freedom over the past four decades have lifted one-third of the world out of poverty, supply chains have become overly concentrated, and that needs to change.

“We need globalization in some areas because it fosters innovation, helps growth and gives jobs and better lives to people, but the balance between security and globalization will shift,” she said. “There’s going to be more fragmentation.”

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