OECD slashes growth outlook, but sees limited stagflation risk

Previously the OECD had expected inflation to peak at 5% before gradually receding to 3% in 2023. Despite the lower growth and higher inflation outlook, the OECD saw a limited risk of stagflation like that seen the mid-1970s, when the oil price shock triggered runaway inflation and surging unemployment.

The war in Ukraine has made the growth outlook far bleaker even though the global economy should avoid a bout of 1970s-style stagflation, the OECD said on Wednesday, slashing its growth forecasts and jacking up its inflation estimates. The world economy is set to grow 3% this year, much less than the 4.5% expected when the Organisation for Economic Cooperation and Development last updated its forecasts in December.

Growth will then slow further next year, easing to 2.8%, down from a previous forecast of 3.2%, the Paris-based policy forum said in its latest Economic Outlook. Meanwhile, any quick relief from price hikes is unlikely, with inflation expected to peak at 8.5% this year in OECD countries before slipping to 6.0% in 2023. Previously the OECD had expected inflation to peak at 5% before gradually receding to 3% in 2023.

Despite the lower growth and higher inflation outlook, the OECD saw a limited risk of stagflation like that seen the mid-1970s, when the oil price shock triggered runaway inflation and surging unemployment. In particular, developed economies, which are much more driven by services than in the 1970s, are less energy-intensive now and central banks have a freer hand to fight inflation, independent of governments more concerned about unemployment.

The OECD said it saw a strong case for steady removal of monetary policy stimulus in high-inflation countries like the United States and eastern Europe. As the pandemic-related fiscal boost expires, the U.S. economy was seen growing 2.5% this year then slowing to 1.2% in 2023 - less than previous forecasts for growth of 3.7% in 2022 and 2.4% in 2023.

China's economy, which has been hit by a fresh wave of COVID-19 lockdowns, is seen growing 4.4% this year and 4.9% next, down from 5.1% previously expected in both years. More exposed to Russian energy imports and the fallout from the war in Ukraine, the euro zone economy was seen growing 2.6% this year and 1.6% in 2023, down from forecasts of 4.3% and 2.5% respectively.