Conflict is a major blow to the world economy that will hurt growth and raise prices.
Alfred Kamar, Jihad Azar, Abebe Amro Selasi, Ian Goldfajan and Changyong Ri
Outside of the suffering and humanitarian crisis caused by Russia’s aggression in Ukraine, the entire world economy will experience the effects of slow growth and rapid inflation.
The effect will flow through three main channels. One, higher prices for commodities such as food and energy will drive up inflation further, resulting in lower income prices and weight on demand. Two, especially neighboring economies, will struggle with disrupted trade, supply chains and remittances, as well as the historic increase in refugee flows. And three, declining business confidence and high investor uncertainty will affect asset prices, tighten financial conditions and potentially encourage capital outflows from emerging markets.
Russia and Ukraine are major producers of goods, and disruptions have pushed up global prices, especially for oil and natural gas. Food consumption has risen with wheat, for which Ukraine and Russia accounted for 30 percent of world exports, reaching a record high.
Outside of the global spillover, countries with direct trade, tourism and financial exposure will experience additional pressure. Economies dependent on oil imports will see wider revenue and trade deficits and more inflationary pressures, although some exporters, such as the Middle East and Africa, may benefit from higher prices.
Rising food and fuel prices could pose a greater risk of unrest in some regions, from sub-Saharan Africa and Latin America to the Caucasus and Central Asia, where food insecurity may increase in parts of Africa and the Middle East.
These reflections are difficult to predict, but we already see our growth forecasts likely to be revised next month when we offer a full picture of our global economic outlook and regional assessment.
In the long run, war could fundamentally change the global economic and geopolitical order if energy trade changes, supply chain restructuring, the payment network segmentation and countries reconsider holding reserve currencies. Increased geopolitical tensions increase the risk of economic fragmentation, especially for trade and technology.
Asia and the Pacific Ocean
The current account will have the biggest impact on the ASEAN economy’s petroleum importers, India, and the border economies, including some Pacific islands. This could be extended by reducing tourism for countries dependent on Russian tours.
Russia’s spillover is likely to be limited due to the lack of close economic ties, but the slowdown in Europe and the world economy will have a major impact on major exporters.
For China, the immediate effects should be small as the revenue stimulus will support this year’s growth target of 5.5 percent and Russia has bought relatively little of its exports. Nevertheless, commodity prices and weak demand in large export markets add to the challenge.
Spillovers are similar for Japan and Korea, where new oil subsidies could mitigate the effects. High electricity prices will push up inflation in India, already at the top of the central bank’s target range.
Asian food price pressures should be reduced through greater reliance on rice rather than local production and wheat. Expensive food and fuel imports will drive up consumer prices, although subsidies and price limits for fuel, food and fertilizers may reduce the immediate impact কিন্তু but with revenue expenditure.
Ukraine already has a lot of tolls. Unprecedented sanctions on Russia will hurt financial intermediaries and trade, inevitably creating a deep recession there. The devaluation of the ruble is pushing up inflation, further lowering the living standards of the population.
As Russia is an important source of natural gas imports, energy is a major spillover channel for Europe. Extensive supply-chain can be disrupted as a result. These effects will increase inflation and slow recovery from the epidemic. Eastern Europe will see rising funding costs and an increase in refugees. It has recently absorbed most of the 3 million people who have fled Ukraine, according to UN data.
European governments could face financial pressures from over-spending on energy security and defense budgets.
Although submerged foreign exposures to Russian assets are moderate by global standards, the pressure on emerging markets could increase if investors seek safe haven. Similarly, most European banks have moderate and manageable direct exposure to Russia.
Caucasus and Central Asia
Outside of Europe, these neighboring countries will experience even greater consequences from Russia’s recession and sanctions. Closed trade and payment-system links will disrupt trade, remittances, investment and tourism, adversely affecting economic growth, inflation and external and revenue accounts.
Although exporters of goods should benefit from higher international prices, they face the risk of declining energy exports if sanctions are extended to the pipeline through Russia.
Middle East and North Africa
Due to high food and energy prices and tight global financial conditions, major ripple effects are likely. Egypt, for example, imports about 80 percent of its wheat from Russia and Ukraine. And, as a popular tourist destination for both, it will also reduce visitor costs.
Inflation control policies, such as increasing government subsidies, can put pressure on already weak financial accounts. In addition, increased external financing conditions could stimulate capital outflows and add a headwind of growth for countries with higher debt levels and larger financing needs.
Rising prices could increase social tensions in some countries, such as weak social security nets, limited job opportunities, limited financial space and unpopular government.
As the continent was slowly recovering from the epidemic, the crisis threatened that progress. Many countries in the region are particularly vulnerable to the effects of war, especially due to high energy and food prices, declining tourism and potential difficulties in accessing international capital markets.
Conflict occurs when there is a minimum policy space in most countries to deal with the impact of a collision. It could exacerbate socio-economic pressures, debts from public debt, and the scourge of epidemics that have already affected millions of families and businesses.
Record wheat prices are typical for a region that imports about 85 percent of its supplies, one-third of which comes from Russia or Ukraine.
In the western hemisphere
Food and energy prices are the main channel of spillover, which in some cases will suffice. High commodity prices could significantly accelerate inflation for Latin America and the Caribbean, which are already facing an average annual rate of 8% in the five largest economies: Brazil, Mexico, Chile, Colombia and Peru. Central banks may need to further protect the credibility of the inflation-war.
The impact of the growth of expensive products varies. Higher oil prices hurt Central American and Caribbean importers, while exporters of oil, copper, iron ore, corn, wheat and metals may charge more for their products and reduce the impact on growth.
Financial conditions remain relatively favorable, but sharp conflicts could lead to a global financial crisis, which will affect growth with tight domestic monetary policy.
The United States has very few relations with Ukraine and Russia, reducing the direct impact, but inflation was already at a four-decade high before the war pushed up commodity prices. That means prices could rise if the Federal Reserve starts raising interest rates.
The consequences of Russia’s war against Ukraine have already shaken not only those countries, but also the region and the world, and point to the importance of a global security cordon and regional system to buffer the economy.
“We live in a more shock-prone world,” Kristalina Georgieva, the IMF’s managing director, told reporters at a recent briefing in Washington. “And we need combined strength to deal with the impending push.”
While some effects may not be fully focused for many years, there are already clear signs that the war and the consequent increase in the cost of essential commodities will make it difficult for policymakers in some countries to maintain a fine balance between inflation and economic support. Recovery from the epidemic.