New variant threatens to disrupt supply chains

Group identifies most urgent policy as speeding up vaccine deployment

The Omicron coronavirus variant threatens to intensify imbalances that are slowing growth and raising costs, the OECD said on Wednesday as it significantly increased its inflation forecasts from three months ago.

The new variant, which was identified last week, could delay the world economy's return to normality, the Paris-based international organisation of largely rich country-members warned.

Monetary policy-makers should be “cautious”, the OECD added, saying that the most urgent policy requirement was to accelerate deployment of COVID vaccines globally.

The recommendations came alongside its twice yearly economic outlook, which left global growth forecasts similar to those three months ago but significantly raised expected inflation.

Across the G20, the OECD raised its inflation forecast for 2022 from 3.9 per cent in its September predictions to 4.4 per cent now. The largest increases were in the U.S. and UK, where inflation forecasts for next year rose in both countries from 3.1 per cent to 4.4 per cent.

Laurence Boone, chief economist of the OECD, told the FT that the Omicron variant was “adding to the already high level of uncertainty and that could be a threat to the recovery, delaying a return to normality or something even worse”.

She did not contradict the hawkish stance voiced on Tuesday by Jerome Powell, chairman of the U.S. Federal Reserve, or recent comments by the Bank of England, commenting that these central banks had already been cautious and that more persistent inflationary pressures in the U.S. and the UK required a slightly tighter monetary stance.

“There is no one-size-fits-all policy because you have a very different situation in some emerging market economies with high inflation rates. The U.S. is also different from Europe and also different from Asia where there's much less of an inflation issue,” Boone said.

She stressed the need for policy-makers to communicate clearly that they would not raise interest rates as a result of supply shortages, but would be ready to act if price pressures broadened and become self-reinforcing.

The OECD noted that the global recovery had been much stronger than it initially expected in 2021, but said this had now created a series of damaging imbalances that could persist longer than expected. “Supply shortages risk slowing growth and prolonging elevated inflation,” Boone said.

In the automotive sector alone, the OECD calculated that supply disruptions knocked more than 1.5 per cent off the size of the German economy this year and more than 0.5 per cent in Mexico, the Czech Republic and Japan.

Alongside such mismatches between supply and demand, the OECD'S main message was that many other large imbalances were emerging in the global economy.

These range from the supply of vaccines — which is far greater in rich countries; a growing gap in economic performance between advanced economies and emerging markets; and a divide between the labour market performance of European countries and the U.S.

In Europe, employment is better protected and higher than pre-pandemic levels, but economic output had not fully recovered lost ground.

In the U.S., the reverse is true.

Boone said the European protection of jobs had been beneficial to people “but some of the necessary reallocation of jobs may not have taken place.” She also said that part of this important trend was likely to be because the initial coronavirus hit was harder in Europe than in the U.S.

In the OECD'S economic forecasts, it projected world economic growth slowing from 5.5 per cent this year to 4.5 per cent in 2022, followed by a 3.2-per-cent expansion in 2023.

Inflation in G20 countries was likely to fall to 3.8 per cent in 2023 after hitting 4.4 per cent next year. However, the OECD forecast that inflation would be below two per cent in the eurozone in 2023, vs. 2.4 per cent in the U.K. and 2.5 per cent in the U.S.