Russian Ukraine conflict concept

Russia’s invasion of Ukraine is both a humanitarian disaster and potentially an economic one, the Organization for Economic Cooperation and Development (OECD) warns.

In a new report, the Paris-based group estimated that the conflict will reduce global economic growth by more than 1% this year, while adding 2.5 percentage points to consumer inflation worldwide.

“The economic damage is already being felt worldwide and risks becoming increasingly severe,” it said, adding that the conflict is “throwing the strong global economic recovery from the Covid-19 pandemic into doubt.”

The report noted that Russia and Ukraine have an outsized impact on the global economy, given that they’re large producers and exporters of essential agricultural products, minerals and energy.

Together, the countries account for about a third of global wheat exports, and they’re also important producers of fertilizers and industrial metals such as nickel and palladium. Additionally, Russia supplies about 16% of the world’s natural gas and 11% of its oil.

Prices for many of these and other commodities increased as the conflict escalated.

“The war has already resulted in sizeable economic and financial shocks, particularly in commodity markets, with the prices of oil, gas and wheat soaring,” the OECD said.

“The commodity supply squeeze resulting from this war, is exacerbating supply chain disruptions brought on by the pandemic, which will likely weigh on consumers and business for some time to come,” said OECD secretary-general, Mathias Cormann, in a release.

“In terms of the policy and market response, we need to remain cool-headed. We need both sensible near-term and sensible longer-term action,” he suggested.

In particular, the OECD report proposed that governments consider targeted fiscal measures to soften the impact on growth.

“In the near term, many governments will need to cushion the blow of higher energy prices, diversify energy sources and increase efficiency wherever possible,” it said. “For food, higher production in OECD countries, refraining from protectionism, and multilateral support for logistics will help the countries most affected by a disruption to supply from Russia and Ukraine.”

The report said targeted fiscal measures, which represent around 0.5 percentage point of GDP, could substantially mitigate the economic impact of the crisis without substantially adding to inflation.

In terms of monetary policy, the group suggested that central banks should stay on track with their plans to normalize rates and combat rising inflation, “with the exception of the most affected economies, where a pause may be needed to fully assess the consequences of the crisis.”

The OECD also said the war has “underlined the importance of minimizing dependence on Russia for key energy imports.”

To that end, it suggested that policy-makers reconsider their approaches, “with a view to ensuring energy security and putting incentives in place to ensure the green transition in a publicly supported way.”

“The EU relies heavily on Russia for its energy supply,” Cormann said, noting that 27% of the region’s crude oil, 41% of its natural gas and 47% of solid fuel imports come from Russia.

“It will take a few years to fully offset this dependency and build energy security in Europe, but action should start now,” he said.

OECD chief economist and deputy secretary-general, Laurence Boone, said, “We also see that this war has set in train de-globalization forces that could have profound and unpredictable effects. Government policy has a crucial role to play in re-establishing some of the certainty and security we have lost.”