OECD: Russia’s invasion of Ukraine can subtract two GDP points from the EU and one from the world

The war in Ukraine will reduce the growth of the world economy by one point during the first year and the impact will be higher in the European Union (EU), where in the event of a complete interruption of energy imports from Russia the effect could be close to two points of GDP.

This is the first assessment of the consequences of the Russian invasion of Ukraine presented this Thursday by the Organization for Economic Cooperation and Development (OECD), which insists that the negative effects will be seen in all regions of the world.

The reason is that global demand will be weakened and purchasing power everywhere will be reduced by inflationary pressures, since the increase in prices will be 2.5 percentage points more than expected.

Before the conflict broke out, the OECD had estimated in December that the world economy was going to continue on the path of recovery after the COVID-19 crisis, with a progression of the Gross Domestic Product (GDP) of 4.5% in 2022 and of 3.2% in 2023. Those projections are completely out of date.

The Secretary General of the OECD, Mathias Cormann, stressed that the most serious consequence is the loss of human lives and “the humanitarian crisis imposed on the Ukrainian people” due to Russia’s “large-scale aggression” against that country, which is also an attack on democratic values.

EU will pay for its dependence on Russia

The EU will pay for its heavy dependence on the fossil fuels it buys from Russia (27% oil, 41% gas and 47% coal). In the euro zone, the war will subtract 1.4 points from GDP, while in the United States the impact will be less (0.9 points).

In addition, there is a potential risk that Russian energy exports to the EU will be totally interrupted, which could decrease GDP growth there by a further 0.5 points and cause a total increase in inflation of about 3.5 points compared to pre-war expectations.

It is true that the blow will be much harder for Russia, which with Western sanctions has been isolated from the financial system, and should suffer a 10% collapse of its production. The OECD has not even wanted to speculate with figures on how Ukraine could be.

These two countries barely represent 2% of the world’s GDP, but they are of significant importance as suppliers of raw materials, not only gas or oil, but also, for example, they represent 30% of wheat exports, 20% of corn.

famine risk

The OECD warns that an interruption in its food sales abroad would leave many developing countries without a supply of basic goods -particularly in the Middle East and North Africa- which implies not only an economic threat, but above all a an increase in poverty and famine.

That is why Cormann called for the EU, the United States and Canada to modify their agricultural policies to increase their production quickly, but without falling into protectionism.

As for the assistance of the three million Ukrainian refugees who have fled to other countries of the Old Continent, the OECD calculates that it will cost at least 0.25% of GDP in the EU in the first year.

A manageable figure for the European bloc as a whole, but which will have to be the object of solidarity so that not only the states bordering Ukraine, which have received the bulk of the refugees, bear the burden.

To deal with the shock due to the pull in energy prices, the organization considers that government actions with budgetary measures can be effective in limiting the cut in growth, but on condition that they are “temporary” and “selective”. .

“We do not believe that market intervention is part of the solution,” stressed Cormann, who insisted that the priority is to protect families in vulnerable situations.

To finance this aid, one of its main ideas is to apply taxes that record the so-called “profits from heaven” that electricity companies are obtaining in Europe thanks to the marginal price-setting system that makes the price of a megawatt hour depend on gas, by margin of the actual costs of other electricity generation technologies.