OECD Economic Outlook, Interim Report

Paying the Price of War

SEPTEMBER 2022
 OECD Economic Outlook, Interim Report

Paying the Price of War

September 2022
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Please cite this publication as:

OECD (2022), OECD Economic Outlook, Interim Report September 2022: Paying the Price of War, OECD Publishing, Paris,
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 3

Paying the Price of War

Summary

 The global economy has been hit by Russia’s invasion of Ukraine. Global economic growth stalled
in the second quarter of 2022, and indicators in many economies now point to an extended period
of subdued growth.
 The war has pushed up energy and food prices substantially, aggravating inflationary pressures at
a time when the cost of living was already rising rapidly around the world.
 Global growth is projected to slow from 3% in 2022 to 2¼ per cent in 2023, well below the pace
foreseen prior to the war. In 2023, real global incomes could be around USD 2.8 trillion lower than
expected a year ago (a shortfall of just over 2% of GDP in PPP terms).
 Annual GDP growth is projected to slow sharply to ½ per cent in the United States in 2023, and
¼ per cent in the euro area, with risks of output declines in several European economies during
the winter months. Growth in China is projected to drop to 3.2% this year, amidst COVID-19
shutdowns and property market weakness, but policy support could help growth recover in 2023.
 Inflation has become broad-based in many economies. Tighter monetary policy and easing supply
bottlenecks should moderate inflation pressures next year, but elevated energy prices and higher
labour costs are likely to slow the pace of decline.
 Headline inflation is projected to ease from 8.2% in 2022 to 6½ per cent in 2023 in the
G20 economies, and decline from 6.2% in the G20 advanced economies this year to 4% in 2023.
 Significant uncertainty surrounds the projections. More severe fuel shortages, especially for gas,
could reduce growth in Europe by a further 1¼ percentage points in 2023, with global growth
lowered by ½ percentage point, and raise European inflation by over 1½ percentage points.
 Further interest rate increases are needed in most major economies to anchor inflation
expectations and ensure that inflation pressures are reduced durably.
 Fiscal support is needed to help cushion the impact of high energy costs on households and
companies. However, this should be temporary, concentrated on the most vulnerable, preserve
incentives to reduce energy consumption and be withdrawn as energy price pressures wane.
 Short-term fiscal actions to cushion living standards should take into account the need to avoid a
further persistent stimulus at a time of high inflation and ensure fiscal sustainability.
 Governments need to ensure that the goals of energy security and climate change mitigation are
aligned. Efforts to ensure near-term energy security and affordability through fiscal support, supply
diversification and lower energy consumption should be accompanied by stronger policy measures
to enhance investment in clean technologies and energy efficiency.
 The fallout from the war remains a threat to global food security, particularly if combined with further
extreme weather events resulting from climate change. International cooperation is needed to keep
agricultural markets open, address emergency needs and strengthen supply.

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Table 1. OECD Interim Economic Outlook GDP projections September 2022

Real GDP growth, year-on-year, per cent

2021 2022 2023

Interim EO Difference from Interim EO Difference from
projections June EO projections June EO
World 5.8 3.0 0.0 2.2 -0.6
G20¹ 6.2 2.8 -0.1 2.2 -0.6
Australia 4.9 4.1 -0.1 2.0 -0.5
Canada 4.5 3.4 -0.4 1.5 -1.1
Euro area 5.2 3.1 0.5 0.3 -1.3
Germany 2.6 1.2 -0.7 -0.7 -2.4
France 6.8 2.6 0.2 0.6 -0.8
Italy 6.6 3.4 0.9 0.4 -0.8
Spain² 5.5 4.4 0.3 1.5 -0.7
Japan 1.7 1.6 -0.1 1.4 -0.4
Korea 4.1 2.8 0.1 2.2 -0.3
Mexico 4.8 2.1 0.2 1.5 -0.6
Türkiye 11.0 5.4 1.7 3.0 0.0
United Kingdom 7.4 3.4 -0.2 0.0 0.0
United States 5.7 1.5 -1.0 0.5 -0.7

Argentina 10.4 3.6 0.0 0.4 -1.5

Brazil 4.9 2.5 1.9 0.8 -0.4
China 8.1 3.2 -1.2 4.7 -0.2
India³ 8.7 6.9 0.0 5.7 -0.5
Indonesia 3.7 5.0 0.3 4.8 0.1
Russia 4.7 -5.5 4.5 -4.5 -0.4
Saudi Arabia 3.4 9.9 2.1 6.0 -3.0
South Africa 4.9 1.7 -0.1 1.1 -0.2

Note: Difference from June 2022 Economic Outlook in percentage points, based on rounded figures. World and G20 aggregates use moving
nominal GDP weights at purchasing power parities. Based on information available up to September 22, 2022.
1. The European Union is a full member of the G20, but the G20 aggregate only includes countries that are also members in their own right.
2. Spain is a permanent invitee to the G20.
3. Fiscal years, starting in April.
Source: Interim Economic Outlook 112 database; and Economic Outlook 111 database.

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Table 2. OECD Interim Economic Outlook headline inflation projections September 2022
Headline inflation, per cent

2021 2022 2023

Interim EO Difference from Interim EO Difference from
projections June EO projections June EO
G20¹ 3.8 8.2 0.6 6.6 0.3
Australia 2.8 6.1 0.9 4.4 0.3
Canada 3.4 6.9 0.9 4.5 0.6
Euro area 2.6 8.1 1.1 6.2 1.6
Germany 3.2 8.4 1.2 7.5 2.8
France 2.1 5.9 0.7 5.8 1.3
Italy 1.9 7.8 1.5 4.7 0.9
Spain² 3.0 9.1 1.0 5.0 0.2
Japan -0.2 2.2 0.3 2.0 0.1
Korea 2.5 5.2 0.4 3.9 0.1
Mexico 5.7 7.9 1.0 4.9 0.5
Türkiye 19.6 71.0 -1.0 40.8 1.9
United Kingdom 2.6 8.8 0.0 5.9 -1.5
United States 3.9 6.2 0.3 3.4 -0.1

Argentina 50.9 92.0 31.9 83.0 32.4

Brazil 8.3 10.8 1.1 6.6 1.3
China 0.8 2.2 0.2 3.1 0.1
India³ 5.5 6.7 0.0 5.9 -0.6
Indonesia 1.6 4.1 0.3 3.9 0.1
Russia 6.7 13.9 -2.3 6.8 -6.5
Saudi Arabia 3.1 2.5 0.3 3.2 0.5
South Africa 4.6 6.7 0.7 5.9 0.1

Note: Difference from June 2022 Economic Outlook in percentage points, based on rounded figures. G20 aggregate uses moving nominal GDP
weights at purchasing power parities. Based on information available up to September 22, 2022.
1. The European Union is a full member of the G20, but the G20 aggregate only includes countries that are also members in their own right.
2. Spain is a permanent invitee to the G20.
3. Fiscal years, starting in April.
Source: Interim Economic Outlook 112 database; and Economic Outlook 111 database.

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Table 3. OECD Interim Economic Outlook core inflation projections September 2022
Core inflation, per cent
2021 2022 2023
Interim EO Difference from Interim EO Difference from
projections June EO projections June EO
G20 Advanced Economies¹ 2.2 4.0 0.1 3.4 0.1
Australia 2.4 5.4 1.0 4.3 0.3
Canada 2.3 4.9 0.6 4.0 0.5
Euro area 1.4 3.9 0.1 3.8 -0.2
Germany 2.2 3.4 -0.6 4.0 -0.4
France 1.3 3.6 0.2 3.8 0.3
Italy 0.8 3.0 0.2 3.0 0.3
Spain² 0.6 3.9 -0.6 4.0 -0.5
Japan -0.7 0.2 0.3 1.6 0.2
Korea 1.4 3.5 0.1 3.2 0.1
Mexico 4.7 7.3 0.6 4.8 0.4
Türkiye 18.3 56.1 -2.8 39.6 1.6
United Kingdom 2.4 6.7 0.3 6.7 0.8
United States 3.3 4.7 0.0 3.1 0.0

South Africa 3.1 4.5 0.3 5.8 0.2

Note: Difference from June 2022 Economic Outlook in percentage points, based on rounded figures. G20 advanced economies aggregate uses
moving nominal GDP weights at purchasing power parities. Based on information available up to September 22, 2022.
1. The G20 advanced economies aggregate includes Australia, Canada, France, Germany, Italy, Japan, Korea, the United Kingdom and the
United States.
2. Spain is a permanent invitee to the G20.
Source: Interim Economic Outlook 112 database; and Economic Outlook 111 database.

The recovery has slowed and inflation has continued to rise

A loss of economic momentum is visible globally, but especially in Europe

The global economy has lost momentum this year. After bouncing back strongly from the COVID-19
pandemic, a return to a more normal economic situation appeared to be in prospect prior to Russia’s
unprovoked, unjustifiable and illegal war of aggression against Ukraine. The effects of the war and the
continuing impacts of COVID-19 outbreaks in some parts of the world have dented growth and put
additional upward pressure on prices, above all for energy and food. Global GDP stagnated in the second
quarter of 2022 and output declined in the G20 economies. While it is likely that growth in the third quarter
has been positive, helped by a pick-up in China, a number of indicators have taken a turn for the worse,
and the global growth outlook has darkened.
Survey-based indicators are particularly weak. Business survey indicators point to stagnating output in
many economies (Figure 1, Panel A), while consumer confidence has fallen to strikingly low levels in most
advanced economies (Figure 1, Panel B). The OECD Composite Leading Indicator for the OECD
economies is also now at the lowest level since the global financial crisis, barring a brief drop at the
beginning of the pandemic in the spring of 2020. With nominal wage growth failing to keep pace with
inflation, household real disposable incomes have declined in many OECD economies, curbing private
consumption growth.

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Figure 1. Survey indicators point to a weakening of activity

A. Composite PMI indicators B. Consumer confidence

70 104

65
102

60
100
55
98
50

45 96

40 94
May-21 Aug-21 Nov-21 Feb-22 May-22 Aug-22 May-21 Aug-21 Nov-21 Feb-22 May-22 Aug-22

World United States Euro area United States Euro area Japan

Note: In Panel B, the series are standardised indicators with the long-run average equal to 100.
Source: OECD Main Economic Indicators database; S&P Global; and OECD calculations.

Financial conditions have tightened as central banks have responded increasingly vigorously to
above-target inflation, pushing up market-based measures of real interest rates. Equity markets in much
of the world have fallen sharply this year, nominal bond yields have risen, the US dollar has appreciated
significantly, and risk appetite has diminished. Corporate bond spreads have risen, particularly in Europe,
and capital outflows from emerging-market economies have intensified. In the United States, the
differential between ten-year and two-year government bond yields has turned negative, a phenomenon
often followed in the past by cyclical downturns; yield curves have tilted in a similar way in some other
advanced economies, especially the United Kingdom (Figure 2). Higher interest rates are also denting
momentum in housing markets. Sales, mortgage lending and housing starts have turned down sharply in
many countries, and prices are now falling on a month-on-month basis in some.
Labour market conditions are tight almost everywhere (Figure 3). In many OECD economies,
unemployment rates are at their lowest levels of the past 20 years, while the ratio of jobseekers to
vacancies remains historically low. Nonetheless, the pace of job growth in North America and Europe has
slowed, vacancies have begun to decline in some countries, and the reduction in the unemployment rate
appears to have bottomed out or even reversed in some countries.
Energy prices have risen sharply, particularly for natural gas. Russia’s progressive reduction in gas flows
to Europe this year has forced European economies to buy more liquefied natural gas (LNG) on spot
markets, driving up LNG prices. Wholesale gas prices in Europe have surged (Figure 4, Panel A), and with
wholesale electricity prices in Europe linked to gas (the marginal source of electricity generation), a similar
electricity price spike has taken place (Figure 4, Panel B). Coal prices are also near record levels, as
electricity generators and some industrial sectors substituted from gas to coal and oil. These phenomena
have been most acute in Europe, but have affected prices in other regions as well, especially Asia.

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Figure 2. Flat or inverted yield curves can signal cyclical recessions

Difference between 2-year and 10-year government bond yields, percentage points

Note: Recessions, marked by shaded areas, are defined as two consecutive quarters of negative GDP growth, except for the United States,
where NBER business cycle dates are used.
Source: Refinitiv; NBER US Business Cycle Expansions and Contractions; OECD Interim Economic Outlook 112 database; and OECD
calculations.

Figure 3. Labour markets remain tight in almost all OECD countries

Unemployment rate, per cent of labour force
30

2022Q2 Highest
25 unemployment
rate since 2002

20

15

10 Lowest
unemployment
rate since
2002
5

0
JPN DEU KOR MEX USA GBR AUS CAN FRA ITA BRA TUR ESP
Note: The shaded areas represent the highest and lowest unemployment rates since 2002.
Source: OECD Labour Market Statistics; and OECD calculations.

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Figure 4. European gas and electricity prices have surged in recent months

A. Gas B. Electricity
Dutch TTF, EUR/MWh Germany, EUR/MWh
350 600

300 500

250
400
200
300
150
200
100

50 100

0 0
Jan-21 May-21 Sep-21 Jan-22 May-22 Sep-22 Jan-21 May-21 Sep-21 Jan-22 May-22 Sep-22

Note: TTF Neutral Gas Price for Europe in Panel A. Rolling 7-day average of daily day-ahead wholesale electricity price in Panel B.
Source: Refinitiv; ENTSO-E; IEA Real-Time Electricity Tracker; and OECD calculations.

At current levels, gas prices in Europe have still more than tripled over the past year and are roughly ten
times their average over 2010-19. Together with elevated average oil, coal and electricity prices so far this
year, illustrative calculations suggest that the ratio of economy-wide expenditures on energy to GDP is
likely to have risen significantly in many countries in 2022, especially in Europe (Figure 5). The world, and
Europe in particular, is bearing the cost of the war in Ukraine, and many economies face a difficult winter.

Figure 5. High prices are pushing economy-wide energy expenditures up significantly this year
Energy expenditures, in per cent of GDP, total economy, selected OECD countries

14
2019/2021 2022

12

10

0
ITA JPN ESP FRA DEU GBR CAN USA

Note: Illustrative estimates of 2022 expenditures on coal, oil, natural gas and electricity based on average consumption of 2019 and 2021 except
for coal (2019 only), and proxies for average year-to-date energy prices in 2022. For coal, the price used corresponds to the Newcastle coal
price; for oil, to Brent; for natural gas, to the TTF hub price for the European countries, the Henry Hub price for Canada and the United States,
and the Asia LNG reference price for Japan; for electricity, it corresponds to the market spot price in each country.
Source: IEA; OECD Economic Outlook 111 database; EIA; JEPX; IESA; EPSIS; and Refinitiv.

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High inflation is becoming entrenched

Even before Russia’s invasion of Ukraine, inflation was above central bank targets in most G20 economies,
driven by the initial surge in energy prices as economies reopened after the pandemic, bottlenecks in
supply chains, rising freight costs and the shift in the composition of private consumption towards goods.
Food prices also increased strongly in many countries. The war in Ukraine has reinforced these price
pressures. With fears of disruptions of the supply of commodities produced by Russia and Ukraine, prices
of oil, gas, coal and industrial metals, as well as of wheat, corn and edible oils, all soared in March 2022,
and fluctuated around higher levels over the next few months. Energy prices remain elevated, but
agreements permitting some agricultural exports from Ukraine to resume have helped food prices move
back down, and weaker demand from China has eased pressures on metals prices.
At the same time, inflationary pressures have become increasingly broad-based, with higher energy,
transportation and other costs being passed through into prices (Figure 6). Wage and unit labour cost
growth has strengthened in many countries, particularly the United States, Canada and the United
Kingdom, putting upward pressure on a wide range of goods and services prices. There has yet to be
strong evidence of an acceleration of nominal wages in the euro area, in part due to the relatively low
incidence of automatic wage indexation but, with high headline inflation and a tight labour market, wage
growth is likely to strengthen.

Figure 6. Inflation has become broad-based in most major advanced economies

Percentage share of products in the inflation basket that have a year-on-year inflation rate above 4%
90
United States Euro area Japan United Kingdom
80

70

60

50

40

30

20

10

0
2021M01 2021M03 2021M05 2021M07 2021M09 2021M11 2022M01 2022M03 2022M05 2022M07
Note: Headline inflation based on the personal consumption expenditures deflator in the United States, harmonised consumer prices in
the euro area and the United Kingdom, and national consumer prices in Japan.
Source: Bureau of Economic Analysis; Eurostat; Statistics Japan; Office of National Statistics; and OECD calculations.

Global growth is projected to weaken further in 2023 with inflation

easing gradually

Global growth is projected to remain subdued in the second half of 2022 and ease further in 2023, resulting
in annual average increases of just under 3% in 2022 and 2¼ per cent in 2023 (Figure 7). Relative to
OECD projections made in December 2021, before the war in Ukraine, global output in 2023 is now
projected to be some USD 2.8 trillion lower (in PPP terms and 2015 prices).

OECD ECONOMIC OUTLOOK, INTERIM REPORT SEPTEMBER 2022 © OECD 2022

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Figure 7. Global growth is significantly weaker than expected prior to the war in Ukraine
World GDP growth, per cent
6
5
4
3
2
1
0
-1
-2
-3
-4
2015 2016 2017 2018 2019 2020 2021 2022 2023
December 2021 Outlook September 2022 Outlook

Source: OECD Economic Outlook 110 database; and OECD Interim Economic Outlook 112 database.

One key factor slowing global growth is the ongoing generalised tightening of monetary policy in most major
economies in response to the greater-than-expected overshoot of inflation targets over the past year. In addition,
the erosion of real disposable household incomes, low consumer confidence and high prices for some energy
products, especially natural gas in Europe, will negatively affect both private consumption and business
investment.
GDP growth is projected to slow in both 2022 and 2023 in most G20 economies (Table 1). For the United States,
annualised growth is projected to be well below potential, at around ½ per cent during the latter half of 2022 and
through 2023. In Europe, many economies are likely to have at best weak growth in the second half of 2022 and
the first quarter of 2023 before some improvement through the remainder of 2023. Near-term output declines are
likely in some, including Germany, Italy, the United Kingdom and the aggregate euro area given the drag exerted
by declining real incomes and the disruptions in energy markets. Japan, Korea and Australia have somewhat
stronger growth momentum currently than Europe and the United States, but that is projected to wane over the
coming quarters, in part due to softer external demand.
In China, policy measures worth up to 2% of GDP to strengthen infrastructure investment, and a rebound
effect from COVID-related restrictions this year, are expected to help growth recover to 4¾ per cent in 2023 after
unusually weak growth of 3.2% in 2022. Softer external demand is a factor in India’s projected slowdown from
8.7% annual growth in FY 2021-22 to around 7% in FY 2022-23 and around 5¾ per cent in FY 2023-24, but this
still represents rapid growth in the context of a weak global economy. Indonesia is expected to experience a
slowdown in the second part of the current year as higher inflation erodes the growth of private consumption, but
GDP is projected to expand by around 5% in 2022 and 4¾ per cent in 2023. Output growth in Saudi Arabia has
been buoyed by high energy prices, and while growth rates are projected to moderate over the forecast horizon,
annual growth could be close to 10% in 2022 and 6% in 2023. Annual growth in 2023 in Argentina, Brazil, Mexico
and South Africa, countries relatively exposed to the global economic cycle and demand in the advanced
economies, is projected to slow to between ½-1½ per cent.
With the global economic cycle turning, energy price inflation subsiding and monetary tightening by most of the
major central banks increasingly taking effect, consumer price inflation is expected to moderate gradually. Based
on energy prices at the level observed in the first half of September, headline inflation is projected to peak in the
current quarter in most major economies and to decline in the fourth quarter and throughout 2023 in most G20
countries (Table 2). Even so, annual inflation in 2023 will remain well above target almost everywhere (Figure 8).

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12 

Figure 8. Inflation is projected to fall slowly in 2023 but remain above target in many economies
Annual consumer price inflation, per cent

12
2022 projection 2023 projection

10

0
BRA ESP GBR DEU EA MEX ITA CAN IND ZAF USA AUS FRA KOR IDN SAU JPN CHN

Note: Projections for India refer to fiscal years.

Source: OECD Interim Economic Outlook 112 database.

In the United States, where inflation may have now peaked and where the tightening of monetary policy
began earlier than in most other large advanced economies, faster progress in bringing inflation back to
target is expected than in the euro area or the United Kingdom. US core inflation (based on the private
consumption deflator) is projected to average around 3% in 2023 (Table 3), and to be around 2¾ per cent
by the end of the year. Inflation pressures in Japan have risen, but remain moderate compared to other
advanced economies. Core inflation is projected to remain below 2% throughout this year and next, with
the current jump in headline inflation slowly fading. By contrast, with the recent spike in energy costs
working its way through the economy and with monetary policy tightening beginning later than in the United
States, both headline and core inflation are projected to remain elevated in much of Europe. Headline
inflation in the euro area is projected to peak at just over 9% and average 6¼ per cent in 2023. Core
inflation in the euro area will remain more moderate, peaking at 4½ per cent around the end of 2022 and
falling below 4% during the latter half of 2023. Similarly, headline inflation in the United Kingdom is
projected to be around 10% in late 2022 before falling back gradually, with average annual inflation in 2023
of just under 6% on a headline basis and 6¾ per cent excluding food and energy.
The inflation outlook across the major emerging-market economies varies widely. China continues to have
relatively low and stable inflation, despite the upward pressures coming from food and energy, but
projected headline inflation in 2023 is somewhat higher than in the recent past, at around 3%. Headline
inflation in the other major Asian emerging-market economies, India and Indonesia, is currently above the
objective of the respective central banks, but monetary policy tightening and weaker global demand are
projected to help bring inflation close to target by the end of 2023. In the largest Latin American economies,
Brazil and Mexico, central banks have raised interest rates quite sharply already, and combined with an
easing of energy price inflation this is expected to bring headline inflation down substantially in 2023.
Argentina and Türkiye have had very high inflation rates for some time, and this is projected to continue
in 2023, even if average annual headline inflation will be somewhat lower than in 2022.

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The major risks to the projections are on the downside

The growth and inflation projections are sensitive to a number of key assumptions, including the absence
of further waves of COVID-19 infections, no escalation or broadening of the war in Ukraine, and the gradual
dissipation of the energy market pressures in Europe.
A key risk around the projections is that the ongoing and planned reductions in energy supplies from Russia
to the EU prove much more disruptive than assumed in the baseline projections. Gas and electricity prices
are already elevated and could jump further in the event of shortages emerging in Europe. Such shortages
could occur if additional non-Russian supplies from outside the EU fail to materialise to the extent expected,
or if the demand for gas is exceptionally high due to a cold winter. EU gas storage levels have been raised
considerably through the course of this year, and are now between 80-90% on average in most member
states. Even at this level, there may not be sufficient storage to ensure that demand in a typical winter can
be met without storage levels in the European gas market being pushed below effective operational levels
(Figure 9). A cold winter could raise shortfalls significantly further unless additional gas supplies could be
obtained in the near term, which would inevitably require substantially higher prices.
Additional supplies, diversification of supply sources and sizeable demand reduction measures are thus
required to minimise the risk of supply disruptions. Such reductions could hit many businesses, and
potentially households. Several manufacturing sectors are especially exposed to gas supply reductions,
particularly metals manufacturers, although the extent of exposure varies considerably across European
economies (Figure 10). Even if the European economies do succeed in obtaining significant additional
supplies, there will still be global costs, given the associated upward pressure on gas prices around the
world and reductions in the supplies available for other countries.

Figure 9. Demand reductions are required to avoid excessively low EU gas storage levels
Scenarios for European gas storage levels, per cent of available storage

100
No change in gas consumption compared to 2017-21
90
Cold winter
80 10% reduction in gas consumption
70 Threshold for heightened risk of supply disruptions

60

50

40

30

20

10

0
Oct-22 Nov-22 Dec-22 Jan-23 Feb-23 Mar-23 Apr-23
Note: Illustrative scenarios for the European gas market based on the assumptions of 90% EU storage levels at the end of September; no further
gas imports from Russia, imports from other sources of 30 bcm/month, and domestic production in the EU and the United Kingdom at average
2019-2021 levels. The “No change” scenario assumes monthly consumption in the EU and the United Kingdom at the average levels observed
between 2017 and 2021 in the corresponding month. The “Cold winter” scenario assumes consumption at the maximum levels observed in the
corresponding months between 2017 and 2021. The ‘10% change in gas demand’ scenario reduces monthly consumption in the ‘No change’
scenario by 10%. A heightened risk of gas supply disruptions is assumed to occur if gas storage levels fall below 30%.
Source: Bruegel; ENTSO-G; Eurostat; IEA; ONS; and OECD calculations.

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Figure 10. An enforced reduction in gas usage could hit some European sectors significantly
Per cent reduction in total energy supply

Transport activity Median

Agriculture/forestry
25th percentile
Wood and wood products
Construction 75th percentile
Mining and quarrying
Residential
Other manufacturing
Non-metallic minerals
Commercial and public services
Paper, pulp and printing
Transport equipment
Total manufacturing
Chemical and petrochemical
Machinery
Iron and steel
Food and tobacco
Textile and leather
Non-ferrous metals

0 -1 -2 -3 -4 -5 -6 -7

Note: Illustrative decline in total sectoral energy supply in event of a 10% reduction in gas usage and a 10% reduction in the use of gas for
electricity. Calculations based on the pattern of energy use in 2020. The figure shows the median sector impact across all EU economies plus
the United Kingdom and the upper and lower quartile thresholds.
Source: IEA World Energy Balances database; Eurostat; and OECD calculations.

Illustrative simulations, using the NiGEM global macroeconomic model, highlight the potential hit to growth and
additional inflation that could arise from gas shortages in the European economies. Shortages are assumed to
push up global energy prices, hit confidence and financial conditions and require a temporary period of enforced
reductions in gas use by businesses.
 In this scenario, global gas prices are assumed to rise by 50% from the first quarter of 2023, reflecting the
pressures in global gas markets from European economies attempting to source additional supply. Higher
gas prices are expected to push up fertiliser prices, which are assumed to rise by 25%, and increased
demand for energy supplies is expected to spill over into oil markets, with oil prices assumed to rise
by 10%. These shocks are assumed to last for at least one calendar year before fading away.
 Given the greater uncertainty that is likely to accompany energy supply disruptions, additional effects are
likely to arise in the EU economies and the United Kingdom from a decline in confidence and higher
financing costs for companies. These effects are modelled by an ex-ante increase of 1 percentage point
in the household saving rate and a 1 percentage point rise in the user cost of capital.
 A temporary period of enforced reductions in business gas usage in early 2023, a negative supply shock,
is modelled as a 3% decline in potential output in all EU economies (and the United Kingdom) in the first
quarter of 2023 via a combination of reduced technical efficiency and a fall in average hours worked. The
decline in output is proportional to the decline in total energy supply for the business sector in the typical
economy in event of an enforced reduction of 10% in gas usage. This shock is assumed to fade gradually
through the course of 2023.

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  15

 Monetary policy reacts to the upturn in inflation in this scenario, with policy interest rates initially raised
before returning towards baseline as inflationary pressures subside. The automatic fiscal stabilisers
provide some help in moderating the impact of the shock, but additional discretionary measures would be
needed to fully cushion household incomes
Taken together, the shocks could reduce growth in the European economies by over 1¼ percentage point
in 2023, relative to baseline, and raise inflation by over 1½ percentage point (Figure 11). This would push
many countries into a full-year recession in 2023. Growth would also be weakened in 2024. Real household
disposable incomes would be hit further, reflecting the drag exerted by higher prices and the decline in
hours worked, and business investment would also be severely affected. Outside Europe, the impact of
the shocks would be smaller, but there would still be adverse impacts from higher inflation on real incomes
(except in gas-producing economies) and weaker demand from Europe. For the world as a whole, inflation
is pushed up by over ½ percentage point in 2023, with growth reduced by just under ½ percentage point.
A related risk is that the impact of Western sanctions against Russian oil exports, which is incorporated in
the baseline projections, could also prove more disruptive than anticipated. At recent levels of supply,
around 2 million barrels per day of Russian crude and refined oil exports to the EU are likely to cease once
the EU sanctions on seaborne oil supplies from Russia take effect. If the result is the temporary withdrawal
from global markets of this supply (close to 2% of global supply) due to difficulties in transporting it to
alternative markets, international prices for some products could be much higher than assumed in the
baseline projections. The forthcoming EU ban on the provision of maritime insurance for Russian oil
shipments to non-EU destinations raises the chances of such disruptions. In addition, shortages of
particular types of fuels previously supplied by Russia could emerge this winter, causing significant
economic difficulties. This could be the case, for example, for diesel in some parts of Europe. These factors
increase the risk that the costs of the war for the global economy could be even higher than assumed in
the baseline. For instance, an additional 20% increase in global oil prices for one year, with a spike at the
start of 2023 that subsequently fades, could add a further 0.6 percentage point to global consumer price
inflation in 2023 and reduce global growth by between 0.1-0.2 percentage points.

Figure 11. Gas shortages in Europe would hit growth and raise inflation

A. Impact on GDP growth of a European gas B. Impact on inflation of a European gas shortage
shortage % pts difference from baseline
% pts difference from baseline
0.0 1.6
2023 2024
-0.2 1.4
1.2
-0.4
1.0
-0.6
0.8
-0.8
0.6
-1.0
0.4
2023 2024
-1.2 0.2
-1.4 0.0
OECD Europe Other OECD Non-OECD World OECD Europe Other OECD Non-OECD World

Note: Illustrative scenario of the impact of gas shortages in Europe following the end of imports of gas from Russia. See text for details of the
shocks considered.
Source: OECD calculations using the NiGEM macroeconomic model.

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16 

Other key risks to the outlook are the uncertain evolution of food prices and the risks associated with high
debt and the weak property sector in China.
 The impact to date of the war in Ukraine, together with a succession of extreme weather events
this year, have left markets for some foodstuffs vulnerable to further shocks. The sharp rise in
fertiliser prices this year may have a negative impact on harvests next year and food security,
especially in emerging-market and developing countries. With extreme weather events becoming
increasingly frequent and severe owing to climate change, and droughts in Europe and China,
there is a clear risk of further spikes in food prices that would place additional upward pressure on
inflation and increase poverty and hunger.
 China faces significant challenges in dealing with its ongoing real estate downturn amidst elevated
levels of corporate debt. If successful, solid economic growth can resume, as projected in the final
part of 2022 and into 2023. However, risks remain of a sustained downturn driven by significantly
weaker private domestic demand. This would be associated with much slower global growth, but
would also push down the prices of energy and other commodities.

Policy requirements

Elevated uncertainty, slowing growth, strong inflationary pressures and the ongoing impact of the war in
Ukraine on energy markets leave policymakers facing difficult choices. Continued monetary policy
tightening is needed to lower inflation durably. Domestic policy measures will need to be carefully calibrated
given uncertainty about the growth outlook, the speed at which higher interest rates take effect and the
potential spillovers from restrictive policy in other countries. Temporary fiscal measures are appropriately
being used to cushion the immediate impact of higher food and energy costs for consumers and
businesses, but these should be balanced against the need to lower energy consumption, limit further
demand stimulus at a time of high inflation and ensure debt sustainability. Policy choices should also
ensure that efforts to strengthen energy security do not hamper the need to hasten the green transition.
Effective and well-targeted reform efforts are required to enhance productivity, reduce inequality,
strengthen resilience and boost living standards. Well-chosen policies, such as increased support for
childcare and reduced tax wedges for lower paid workers, could help to address the current pressures
faced by lower-income households and offer medium-term benefits for employment and inclusion.

Additional monetary policy tightening is required to lower inflation

Interest rates have been raised sharply by most major central banks in recent months, with policy choices
becoming increasingly contingent on current developments. In a number of countries, including the
United States, financial conditions are also being tightened due to ongoing reductions in central bank
balance sheets. Broadening price pressures throughout the economy have led to more forceful policy rate
rises than suggested by earlier forward guidance to minimise the risks of high inflation becoming
entrenched in inflation expectations and feeding through into wage growth in historically-tight labour
markets. Delaying action would have heightened the risk of even more forceful measures eventually being
required to bring inflation down. The differential between domestic and US policy rates is also becoming
an important policy consideration in those economies in which price pressures are being pushed up by
sizeable bilateral currency depreciations against the US dollar over the past few months.
Further policy rate increases are needed in most major advanced economies to ensure that forward-
looking measures of real interest rates become positive and inflation pressures are reduced durably. This
is likely to involve a period of below-trend growth to help lower resource pressures. Policy interest rates
are projected to rise to 4½-4¾ per cent in the United States, 4½ per cent in Canada, and 4¼ per cent in
the United Kingdom in 2023, reflecting the visible labour market pressures in these countries, and 3.6% in
Australia (Figure 12). In the euro area, the ECB is facing a challenging environment given the very

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  17

uncertain outlook but increasingly widespread inflationary pressures. The main refinancing rate is projected
to rise to 4% in 2023, with use being made of all margins of flexibility when reinvesting the proceeds of
maturing bonds on the ECB balance sheet to limit financial fragmentation in the euro area. In Japan, where
underlying price pressures remain mild, the Bank of Japan is projected to maintain its current policy stance
focused on yield curve control, with policy rates remaining unchanged.

Figure 12. Further monetary policy tightening is needed in many economies

Policy interest rates, end of period, per cent

United States Euro area United Kingdom Brazil India

5 16
Mexico South Africa
14
4
12

3 10

8
2
6

4
1
2

0 0
2017 2018 2019 2020 2021 2022 2023 2017 2018 2019 2020 2021 2022 2023

Source: OECD Interim Economic Outlook 112 database.

Tighter global financial conditions and persistent inflation pressures are also likely to require further monetary policy
tightening in many major emerging-market economies, and limit the scope for any easing in countries where
growth is slowing and interest rates have already been raised substantially. Food, fertiliser and energy prices are
all elevated, have a sizeable weight in national inflation measures, and a significant impact on inflation
expectations. Reserve requirement ratios and benchmark interest rates have recently been reduced in China to
address the slowdown in growth, but little further monetary policy easing is projected.
The calibration of monetary policy tightening is particularly challenging given uncertainty about the outlook, the
balance of the different channels through which higher interest rates impact the economy, and the potential
spillovers from tightening in other countries. In many economies it is two decades since a sustained policy
tightening last occurred. Higher debt levels, elevated asset prices, changes in the flexibility of product and labour
markets, financial innovation and the increased importance of non-bank credit provision, and greater trade and
financial openness may all increase the pace at which policy rate changes feed through, particularly with
widespread tightening throughout most of the world. Careful monitoring will be required to guard against the risk
that policy rates could be tightened excessively, or for longer than necessary to bring down inflation.

Fiscal policy support measures to address the energy crisis should be

timely and temporary

The war in Ukraine and soaring energy prices have led to a reconsideration of near-term budgetary objectives,
despite the higher debt accumulated during the pandemic, rising bond yields and longer-term spending pressures.
New fiscal measures have been implemented to shield households and companies from surging energy and food
prices in almost all countries. Several large European countries have already announced successive support
packages that cumulatively amount to 2% of GDP, or more, with most likely to continue support measures well
into 2023 at least. Additional support measures for next year have already been announced in Germany, France

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18 

and the United Kingdom, and the projections assume that current measures are extended in Italy, Japan and
Spain. The overall impact of these policies on debt is uncertain, with higher-than-expected revenue gains due to
rising inflation, and – in some countries - windfall taxes on the exceptional profits of some energy producers and
suppliers appropriately helping to offset the overall budgetary cost. The proposed EU-level cap on the prices paid
to lower-cost electricity producers (renewables and nuclear) and a possible additional tax on the windfall profits of
fossil fuel producers could provide some additional resources for countries who do not currently impose such
levies, but is not incorporated in the projections. In the United States, fiscal tightening is projected to continue into
2023.
Short-term actions to cushion living standards need to be balanced against the need to avoid a further persistent
stimulus at a time of high inflation, which would require monetary policy to be tighter for longer than otherwise and
raise debt service costs, and the need to ensure fiscal sustainability. Credible fiscal frameworks would help to
provide clear guidance about the medium-term trajectory of the public finances and mitigate concerns about debt
sustainability. A careful reassessment of the composition of public expenditure and taxation would also help to
preserve investment to enhance infrastructure and energy security whilst fiscal buffers are rebuilt.
Fiscal policy action to help cushion the impact of higher energy prices should ideally be well targeted on the most
vulnerable, not outlast the period of exceptional price pressures and preserve incentives to reduce energy
consumption. Additional means-tested transfers to households while high prices persist generally meet these
criteria, though are more administratively complex and potentially less timely than less well-targeted measures
that cap energy prices or reduce indirect taxes on energy. The latter measures also damp short-run inflationary
pressures, but typically involve larger fiscal costs (Figure 13). In Europe, the exceptional surge in gas and electricity
prices seen since mid-2022 has temporarily shifted the balance towards more broad-based but costly support via
price caps for consumers and businesses, particularly SMEs. Careful design of these different policies is
necessary to ensure that consumers and businesses clearly face a higher relative price of energy, and to avoid
hampering reallocation by preserving energy-intensive activities that are not sustainable in the medium term.
Governments also need to keep in mind the risk that the energy crisis could continue for several years.
Slow global growth, rising debt levels, higher interest rates and a strong US dollar limit the room for fiscal policy
manoeuvre in many emerging-market economies, especially ones with high levels of foreign-currency-
denominated debt or fiscal deficits considerably above pre-pandemic levels. Commodity-exporting countries have
some scope to use windfall revenues to support vulnerable citizens, but many also need to continue to take action
to restore sound public finances. A rising number of lower-income developing countries are already experiencing
debt distress, with a few having already defaulted, and the risk of contagion means that even economies with
relatively low debt levels may come under increased pressure. Stronger international co-operation on debt relief,
including through the G20, is necessary to minimise the potential adverse economic and social consequences of
default.

Governments should promote climate change mitigation and longer-term resilience as well as
short-term energy security

The Russian invasion of Ukraine has brought a heightened awareness of the link between energy policy and
security, with many OECD countries still heavily reliant on fossil fuel energy and supply from Russia. There may
be tensions, especially in Europe, between the immediate imperative of adjusting to the gas supply crunch created
by Russia and the need to hasten the transition to net zero emissions by 2050. The extreme swings in European
gas prices have, for example, triggered some gas-to-coal and gas-to-oil switching, which supports near-term
supply but is unhelpful from the perspective of the net-zero transition. Policy action needs to make sure that the
goals of energy security and climate change mitigation are aligned. Accelerating the transition away from fossil
fuels represents the best way of responding to the reduction in energy supply from Russia.

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  19

Figure 13. Fiscal measures to offset energy costs have been poorly targeted
Billion USD
160
Targeted Non-targeted
140

120

100

80

60

40

20

0
Income support Price support
Note: Estimated expenditures incurred between October 2021 and December 2022, covering 32 OECD countries and 3 non-OECD countries.
Loans, guarantees and capital transfers that do not immediately add to general government net lending are not included. Measures classified
as income support are those that provide lump-sum transfers to energy consumers, i.e., households or businesses, to help alleviate energy cost
increases. Price support includes all measures that reduce the post-tax energy price such as price controls, reduced electricity charges and
network fees, VAT and excise tax reductions, and compensation to distributors for selling energy products at reduced prices. Measures classified
as targeted are ones provided to specific groups, such as vulnerable households or businesses. Non-targeted measures apply to all consumers
with no eligibility conditions. Based on data as of September 2022.
Source: OECD calculations.

Building on the momentum established by initiatives such as REPowerEU in the European Union and the
US Inflation Reduction Act, governments should pursue a range of policies to promote both energy security
and the green transition. This will require a variety of different policy instruments – price-based, non-price
regulation and public investment – the relative importance of which will differ across countries depending
on their initial circumstances. IEA estimates suggest that global investment in clean energy and energy
infrastructure will need to more than triple by 2030 in order to ensure the world is on a credible path to zero
net emissions by 2050. Meeting that objective is likely to require long-term carbon pricing trajectories to
render such investments more viable. A clear policy framework combining price signals and regulatory and
fiscal tools is therefore necessary.
Closer international cooperation is needed for both near-term energy security and an effective approach
to climate change. Within Europe there is an urgent need to co-ordinate on supply diversification and the
reduction in energy consumption, improve gas and electricity interconnections and reinforce solidarity
among EU members to prevent energy hardship this winter in the Northern hemisphere countries most
affected by the disruption of energy imports from Russia. More broadly, greater cross-border co-operation
on climate policies, including carbon pricing, would help mitigate leakage, lower the cost of emission
reductions and improve worldwide access to low-emission technologies.

OECD ECONOMIC OUTLOOK, INTERIM REPORT SEPTEMBER 2022 © OECD 2022

OECD Economic Outlook, Interim Report
Paying the Price of War
The world is paying a high price for Russia’s war of aggression against Ukraine. The high humanitarian cost
continues to grow and the global economic outlook has darkened further.
This Interim Report focuses on the effects of the war on the world economy and the energy crisis. With
the impacts of the COVID‑19 pandemic still lingering, the war is dragging down growth more than anticipated.
Inflation has intensified and become widespread across countries and consumer items. The risk of energy
disruptions has risen. The Interim Report is an update on the assessment in June 2022 issue of the OECD
Economic Outlook (Number 111).

PDF ISBN 978-92-64-49204-2

September 2022
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