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 says, slashing its growth forecasts and jacking up its inflation estimates.
The world economy is set to grow 3 per cent this year, much less than the 4.5 per cent 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 per cent, down from a previous forecast of 3.2 per cent, the Paris-based policy forum said in its latest Economic Outlook.
"Russia's war is indeed posing a heavy price on the global economy," OECD Secretary General Mathias Cormann told a news conference on Wednesday.
"Global growth will be substantially lower with higher and more persistent inflation," he said, adding the OECD was not forecasting recession although there were numerous downside risks to the outlook.
Meanwhile, any quick relief from soaring costs is unlikely, with inflation expected to peak at 8.5 per cent this year in OECD countries before slipping to 6.0 per cent in 2023. Previously the OECD had expected inflation to peak at 5 per cent before gradually receding to 3 per cent 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 are much more driven by services and less energy-intensive than in the 1970s and central banks have a freer hand to fight inflation, independent of governments more concerned about unemployment.
"To mitigate the cost of inflation, the burden will need to be split between profits and wages, that is about employers and employees negotiating to share this cost in a fair way and avoid a wage price spiral," OECD chief economist Laurence Boone said.
The OECD said it saw a strong case for steady removal of monetary policy stimulus in high-inflation economies, such as the United States and eastern Europe.
As the pandemic-related fiscal boost expires, the US economy was seen growing 2.5 per cent this year before slowing to 1.2 per cent in 2023, down from previous forecasts of 3.7 per cent and 2.4 per cent growth, respectively.
China's economy, which has been hit by a fresh wave of COVID-19 lockdowns, is seen growing 4.4 per cent this year and 4.9 per cent next, down from 5.1 per cent previously expected in both years.
More exposed to Russian energy imports and the fall-out from the war in Ukraine, the euro zone economy was seen growing 2.6 per cent this year and 1.6 per cent in 2023, down from forecasts of 4.3 per cent and 2.5 per cent respectively.