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 US 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, chair of the US 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 US and the UK required a slightly tighter monetary stance.
"There is no one-size-fits-all [monetary] policy because you have a very different situation in some emerging market economies with high inflation rates. The US 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 policymakers 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 there were many other large imbalances 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 US.
In Europe, employment is better protected and higher than pre-pandemic levels, but economic output had not fully recovered lost ground. In the US, 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 US.
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 2 per cent in the eurozone in 2023, vs 2.4 per cent in the UK and 2.5 per cent in the US.
Written by: Chris Giles
© Financial Times
