The global economy is facing significant challenges. Growth has lost momentum, high inflation has broadened out across countries and products, and is proving persistent. Risks are skewed to the downside. Energy supply shortages could push prices higher. Interest rates increases, necessary to curb inflation, heighten financial vulnerabilities. Russia’s war in Ukraine is increasing the risks of debt distress in low income countries and food insecurity.
Confronting the Crisis
OECD Economic Outlook, November 2022
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The world is coping with a massive energy price shock
Russia’s war of aggression against Ukraine has provoked a massive energy price shock not seen since the 1970s.
The increase in energy prices is taking a heavy toll on the world economy, which will worsen if European gas storage runs short. This could force rationing in Europe, hurt countries worldwide as global gas prices are pushed higher.
Growth would be lower and prices higher in Europe and worldwide.
Growth has been slowing
Tighter monetary policy and higher real interest rates, persistently high energy prices, weak real household income growth and declining confidence are all expected to sap growth. The United States and Europe are slowing sharply and the major Asian emerging-market economies are expected to account for close to three-quarters of global GDP growth in 2023.
Inflation will remain high in 2023, but will moderate
Inflationary pressures have intensified, largely due to the war in Ukraine, which has pushed up energy and food commodity prices. The higher price of energy has helped trigger increasing prices across a broad basket of goods and services. Tighter monetary policy and decelerating growth will help to eventually moderate inflation.
What should governments do?
Measures to cushion the consequences of energy price increases should be targeted, temporary, and preserve incentives to reduce energy consumption.
Support should avoid persistent stimulus to demand at a time of high inflation.
To head off energy shortages and even higher energy prices, energy use must be reduced and supplies diversified immediately, coupled with accelerating investments in clean technologies and energy efficiency. This policy mix would improve both energy security and the prospects of meeting climate objectives.
The cost of living crisis calls for structural reforms that have a large, direct effect on household disposable income and reduce price pressures.
Policies, such as increased support for childcare and investing in skills, could help women and youth back into work, boosting household incomes, economic growth, and inclusion.
Keeping international borders open to trade would improve access to food and other goods at lower prices, while accelerating the trade engine of growth.
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Working paper9 August 2024