OECD cuts growth outlook, but sees limited risk of stagflation

US Secretary of State Antony Blinken listens to Mathias Cormann, Secretary General of the Organization for Economic Co-operation and Development, speak during a press briefing at the OECD Ministerial Council meeting, in Paris, France, October 6, 2021. Ian Langsdon/Pool via REUTERS

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PARIS, June 8 (Reuters) – The war in Ukraine has clouded growth prospects even as the global economy is expected to avoid 1970s-style stagflation, the OECD said on Wednesday, cutting its growth forecast and increasing its inflation estimates. .

The global economy is expected to grow 3% this year, much less than the 4.5% projected in the Organization for Economic Co-operation and Development’s last December forecast update.

Growth will then slow further next year, falling to 2.8% from a previous forecast of 3.2%, the Paris-based policy forum said in its latest economic outlook.

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“Russia’s war is indeed taking a heavy toll on the global economy,” OECD Secretary-General Mathias Cormann told a news conference.

“Global growth will be significantly weaker with higher and more persistent inflation,” he said, adding that the OECD did not expect a recession although there are many downside risks to the outlook. .

Meanwhile, any quick relief from soaring costs is unlikely, with inflation expected to peak at 8.5% this year in OECD countries before falling to 6.0% in 2023. Previously, the The OECD expected inflation to peak at 5% before gradually declining to 3% in 2023.

Despite the weaker growth and higher inflation outlook, the OECD saw limited risk of “stagflation” like that seen in the mid-1970s, when the oil price shock triggered runaway inflation and soaring unemployment.

In particular, developed economies are much more service-driven 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 have to be shared between profits and wages, i.e. employers and employees negotiate to share this cost fairly and avoid a wage price spiral. “, said the chief economist of the OECD, Laurence Boone.

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DEGRADED OUTLOOK

The OECD said it sees a strong case for the steady removal of monetary policy stimulus in high inflation economies, such as the United States and Eastern Europe.

As the pandemic-related fiscal stimulus expires, the U.S. economy grew 2.5% this year before slowing to 1.2% in 2023, down from the previous growth forecast of 3 .7% and 2.4%, respectively.

China’s economy, which has been hit by a fresh wave of COVID-19 lockdowns, is expected to grow 4.4% this year and 4.9% next, compared with 5.1% previously expected for the two years.

More exposed to Russian energy imports and fallout from the war in Ukraine, the eurozone economy is expected to grow 2.6% this year and 1.6% in 2023, against forecasts of 4.3% and 2 .5% respectively.

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Reporting by Leigh Thomas; Editing by Catherine Evans and Tomasz Janowski

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