The latest forecast for the world economy shows a bleak outlook for a world torn apart by the COVID-19 pandemic and Russia’s war against Ukraine.
Almost all countries are expected to experience slower growth in 2022-2023 due to the ongoing war between Russia and Ukraine, according to a recent report by the Organization for Economic Co-operation and Development (OECD).
With the ongoing war between Russia and Ukraine, the OECD recently lowered its estimates of global growth, reducing it to 3% in 2022 from 4.5% projected last year.
In 2023, global growth is expected to decline by another 2.75 percent.
Current inflation in OECD countries in 2022 is 9 percent, twice as much as previous forecasts. The organization said that with the ongoing humanitarian crisis, high inflation could persist in rich countries and create food shortages for the poorer ones. He called for global cooperation to prevent a food crisis by avoiding mistakes similar to those that led to inequalities in the distribution of vaccines.
“The cost of this war is high and will have to be shared,” said Lawrence Boone, the OECD’s chief economist.
The report says that if the war continues to escalate, European economies that rely heavily on Russian fuel could deteriorate, as alternative energy sources may not be enough or easy to grow.
“Governments also need to play a role by supporting those most vulnerable to rising food and energy inflation,” Ms Boone said.
AND SO, WHERE IS CANADA?
Canada’s economy has largely recovered from the pandemic, but an OECD report says the Bank of Canada must continue to raise interest rates and shrink its balance sheet to return to its inflation target.
Along with revenues from high resource prices, much of the recovery, the report said, is due to limited trade ties with economies that have been hit hard by the war in Ukraine.
Current inflation in Canada is 6.8% – the highest since 1991 – but the country may follow the same path of the aggressive increase in US Federal Reserve interest rates last week, the highest since 1994.
The OECD expects the Bank of Canada to move more quickly to tighten policy so that domestic production capacity is not strained by growing demand.
The Bank of Canada raises interest rates to limit the impact of inflation.
In a recent speech in Montreal, Bank of Canada Deputy Governor Tony Gravel said that “the sharp recovery in global demand for goods, along with restrictions on the pandemic and some weather events, created the perfect storm.”
With growing demand, federal and provincial governments need to focus on strong resource revenues to reduce public debt, while focusing on temporary income support for households facing cost-of-living pressures, the report said.
In a recent review of the financial system, the Bank of Canada said the share of heavily indebted households has increased.
“In Canada, rising household debt levels and high house prices remain two key interrelated vulnerabilities,” the bank said in its annual review of the financial system.
INCREASE IN POLICY RATE
Following the easing of containment measures at the end of January, Canada made large gains in intensive contact services and a strong contribution from the resource, construction and manufacturing sectors.
But the report warns of supply chain disruptions exacerbated by labor shortages and high inflation. Rising food and energy prices are already reducing the purchasing power of the average Canadian household and will have a negative impact on private spending, even when the savings rate returns to more normal levels, according to the OECD.
The OECD said more interest rate hikes from the Bank of Canada could help ease price pressures and bring monetary policy to a neutral position where it neither stimulates nor weighs on the economy.
According to the OECD, Canada’s interest rate is projected to rise to 2.5% by early 2023. In the event of continued inflation, the organization forecasts a further increase in interest rates.
In June, the Bank of Canada’s second increase of 50 basis points brought the base interest rate to 1.5%.
“We are taking these big steps because inflation is constantly high, the economy is overheating and the risk of rising inflation has increased,” Bank of Canada Deputy Governor Paul Baudry said in a statement.
STRONG GROWTH TO CONTINUE EXTERNAL SHOCKS ON ENVIRONMENT
The OECD predicts that Canada’s real GDP will grow by 3.8% in 2022 and said the country can withstand the economic turmoil of the Russia-Ukraine war, as it has limited trade ties with severely affected economies.
The OECD said most economies were relatively tight and now experiencing labor shortages with a sharp rise in job vacancies. The latest Statistics from Canada shows that vacancies rose to 957,500 in the first quarter, the highest quarterly number in history.
The pandemic has led to a huge decline in international migration, which has contributed to labor shortages in some countries.
For Canada, the OECD said higher immigration in the country would help alleviate this labor shortage and put pressure on wages in limited supply industries.
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