Ukraine war could hit global growth, OECD warns

The war in Ukraine could shave more than a percentage point off global economic growth in the first year after the invasion, a report says.

The Organization for Economic Development (OECD) said the impact could also lead to a “deep recession” in Russia if it continues.

It also warned that the conflict could push global prices up by around 2.5%.

In response, the organization called for targeted financial support for the poorest.

Costs were already rising due to increased demand as Covid restrictions eased.

But if the moves in commodity prices and financial markets continue, consumers could see that the inflation rate, which tracks how the cost of living changes over time, will rise even further, the OECD said.

For example, the prices of oil, gas, metals and chemicals essential to fertilizer production have skyrocketed as concerns mount over supplies from the region.

Although Russia and Ukraine make up only a small percentage of the world economy, they are huge producers of commodities.

In its new study, the OECD assumes that oil prices will remain higher by a third, gas prices by 85% and wheat prices by 90%.

Outside of Russia and Ukraine, the organization indicated that most of the pain would be felt in Europe, where up to 1.4% would stall the economy.

Europe is more dependent on Russia and Ukraine for energy and food supplies. The countries have historically been referred to as the “breadbaskets” of Europe.

Countries “that share a border with either Russia or Ukraine” would feel the impact most, while bearing the brunt of the refugee flows from Ukraine, the OECD said. However, the price shock could be felt more by those in the developing world.

It added that governments could cushion the recent blow to fiscal budgets with a “targeted fiscal response”.

“Well designed and carefully targeted fiscal support could mitigate the negative impact on growth with only a small additional boost to inflation.”

It suggested this could be funded by a one-off windfall tax on oil and gas companies in some countries to help households cope with higher bills.

Spain has already announced something similar, although Britain has largely resisted so far. The government argues that a windfall tax would deter companies from investing in the UK.

The group of developed economies also said central banks should for the most part stick to interest rate plans set before the conflict erupted.

“Monetary policy should remain focused on ensuring well-anchored inflation expectations,” it said.

“Most central banks should continue with their pre-war plans, with the exception of the hardest-hit economies, where a pause may be needed to fully assess the fallout from the crisis.”