Beyond the ongoing humanitarian disaster and destruction caused by Russia’s attack on Ukraine, the economic damage will become increasingly severe the longer the war goes on, the Organisation for Economic Cooperation and Development (OECD) has warned.
The organisation’s assessment of the economic and social impact of the war in Ukraine estimates global economic growth will be more than 1 percentage point lower this year because of the conflict.
And inflation, already high at the start of the year, could rise by a further 2.5 percentage points on aggregate across the world.
Russia and Ukraine, together, account for about a third of global wheat exports and are important producers of fertilisers and metals used in industry such as nickel and palladium.
Disruptions to wheat, maize and fertiliser risk raising hunger and food insecurity across the world, while soaring metals prices could affect a wide range of industries such as aircraft, car and chip manufacturing.
With Russia supplying around 16% of the world’s natural gas and 11% of oil, energy prices have jumped alarmingly, the OECD said.
The organisation said the price shock will hurt households and disrupt the production of goods and services worldwide.
Presenting the analysis, OECD Secretary-General Mathias Cormann said: “The commodity supply squeeze resulting from this war, is exacerbating supply chain disruptions brought on by the pandemic, which will likely weigh on consumers and business for some time to come. In terms of the policy and market response, we need to remain cool-headed. We need both sensible near-term and sensible longer-term action.”
Europe, in particular, is highly dependent on Russian gas and oil. Gas spot prices in Europe are now more than 10 times higher than a year ago while the cost of oil has nearly doubled over the same period.
Cormann noted that the EU imports 27% its crude oil, 41% of its natural gas and 47% of solid fuel from Russia.
“It will take a few years to fully offset this dependency and build energy security in Europe, but action should start now,” he said. “In these extreme circumstances faced by the European energy market, I would strongly encourage an open-minded re-examination of current policy settings, including a reassessment of the most appropriate market structure and design – to ensure energy security and affordability, while remaining on track to meet climate objectives.”
The OECD said the advanced economies of the Asia-Pacific region and the Americas have weaker trade and investment links with Russia than Europe, and some are important commodity producers, but growth will still be hit by weaker global demand and by the impact of higher prices on household incomes and spending.
In emerging market economies, steeper declines are projected for those that are major commodity importers. Higher food and energy prices are expected to push up inflation more than in the advanced economies. The threat of cereal shortages, in particular, underlines the need to ensure that trade keeps flowing.
OECD Chief Economist and Deputy Secretary-General Laurence Boone said: “Just as the world economy appeared to be emerging from two years of the COVID-19 crisis, a brutal and devastating war has broken out in Europe. We do not yet know how this will fully play out but we do know this will hurt the global recovery and push inflation up even higher.
“We also see that this war has set in train de-globalisation forces that could have profound and unpredictable effects,” she said. “Government policy has a crucial role to play in re-establishing some of the certainty and security we have lost.”
In response to the supply shock, monetary policy should remain focussed on ensuring well-anchored inflation expectations and to intervene if needed, to ensure the smooth functioning of financial markets, the OECD said.
Immediate spending priorities for governments include the costs of supporting refugees in Europe while temporary, timely and well-targeted fiscal measures are needed to cushion the immediate impact of the crisis on consumers and businesses.
The OECD analysis highlighted that temporary cash transfers targeted to vulnerable consumers can be an efficient way of mitigating the impact of energy prices rises, whereas other measures were either less well-targeted to those in genuine need of support or would create counterproductive distortions.
The OECD assessment estimated that well-targeted government fiscal measures of around 0.5 percentage point of GDP could substantially mitigate the economic impact of the crisis without substantially adding to inflation.
The analysis said the war had underlined the importance of minimising dependence on Russia for key imports and diversifying energy sources, as well as accelerating the transition away from fossil fuels by investing more in renewable energy.
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