The world as a whole has been jolted by the war in Ukraine, according to the Organization for Economic Cooperation and Development, which cut almost all growth forecasts for the Group of 20 next year while anticipating further interest-rate hikes too.

The global economy will expand just 2.2% in 2023, the Paris-based organization said Monday. The new projection for the year means output will be $2.8 trillion less than officials had predicted at the end of 2021.

The OECD slashed GDP forecasts for most of the G-20, with only Indonesia featuring a moderately higher outlook. Many of the group face noticeably faster inflation too.

"The global economy has been hit," the OECD said in interim forecasts. "The world, and Europe in particular, is bearing the cost of the war in Ukraine, and many economies face a difficult winter."

The outlook provides a snapshot of the synchronized shock stemming from Russia's attack on Ukraine and the ensuing energy crunch that has inflicted a widespread cost-of-living crisis.

Global central banks have delivered rate hikes this month adding up to more than 2,000 basis points combined to fight soaring consumer prices. That's not yet enough, according to OECD officials.

"Inflation has become broad-based in many economies," they said in the report. "Further interest-rate increases are needed in most major economies to anchor inflation expectations and ensure that inflation pressures are reduced durably."

The growth hit is particularly visible in Europe. The OECD now expects Germany, the region's biggest economy, to contract 0.7% next year.

"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," according to the report.

Officials predict "near-term output declines" in Germany, Italy, the U.K. and "the aggregate euro area, given the drag exerted by declining real incomes and the disruptions in energy markets."

The OECD highlighted the "significant uncertainty" surrounding its projections, which assume the absence of further COVID waves, no escalation or broadening of the war in Ukraine and a calming down of energy-market pressures.

"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," the OECD said. "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."

More severe fuel shortages, especially for gas, could reduce growth in Europe by a further 1.25 percentage points in 2023 and raise inflation by over 1.5 percentage points, the OECD said, pushing "many countries into a full-year recession in 2023" and European growth "would also be weakened in 2024."

The report also showed:

  • In China, growth will slow to 3.2% this year amid repeated COVID-19 shutdowns and a crisis in the property market, "but policy support could help growth recover in 2023," the OECD said.
  • The U.S. economy will grow just 0.5% next year.
  • Fiscal support is required to "help cushion the impact of high energy costs on households and companies," but it must be "temporary, concentrated on the most vulnerable, preserve incentives to reduce energy consumption and be withdrawn as energy price pressures wane."
  • Food security remains under threat because of the war and international cooperation is required to "keep agricultural markets open, address emergency needs and strengthen supply."

Zoe Schneeweiss reports for Bloomberg News.

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