With the war in the Ukraine entering its third month and victory as elusive as ever for the Russians, political pundits are hard at work trying to figure out what Vladimir Putin’s motives for starting this war were in the first place? Those who believe that he was attempting to level the playing field with NATO and the West are also wondering whether he also sought to hurt the global economy, more specifically the Western economies which he was increasingly unable to compete with.
Economists who have their fixed lists of ills that are impacting the economy nowadays have added the Russian invasion of Ukraine to their list which already includes such issues as supply chain problems, labor shortages, Covid, and inflation. It is precisely because the Russians are so unpredictable that the experts feel so handicapped to predict economic growth. Still and all, some predictions were made. The International Monetary Fund has slashed its expectations for global economic growth over the next two years because of Russia’s invasion of Ukraine, comparing the ripple effects from the conflict to an “earthquake.” The IMF which in 2021 predicted that economic growth would be at 6.1% now expects the world economy to expand by only 3.6% in both 2022 and 2023.The World Bank more or less agrees, forecasting economic growth to expand by only 3.2% in 2022.
These international economic power groups, of course, do not know how the war in the Ukraine will fare. Nor do they know what happens to energy with sanctions imposed on Russia. And then there is the future of Covid. The economists who are focused on Russia’s attempts to hurt the Western economies say that the conflict will hit Ukraine and Russia the hardest. The IMF expects Ukraine’s economy to shrink 35% this year, while the West’s efforts to punish Russia are poised to cause its economy to contract by 8.5%.
So, the question for us isa whether we should at all be worried? The answer is yes, but in so many different categories. The war has already caused a spike in the price of energy, and we are feeling it at the gas pump. It will probably keep the embers of inflation burning, worsen supply chain problems and fuel ongoing inflation. In Europe, the ramifications may be even more dire. It relies heavily on Russia to meet its energy needs.
The economists are smelling recession although they are reluctant to mention the feared word. What would happen, for example, if the Russians cut off energy supplies to Germany, Europe’s biggest economy. They would stand to lose the most over the next two years, the country’s top forecasters have said. If that doesn’t lead to recession, what would? Jari Stehn, chief European economist at Goldman Sachs, told CNBC that the impact of the war in Ukraine was already putting the brakes on Europe’s economy.
Where does this all lead? US economists are focused on inflation because they believe that it will have a domino effect on many sectors in the economy. “Inflation from agribusinesses, energy and supply chains is spinning unchecked – and, like a nuclear reaction, they are triggering a host of follow up consequences. It feels a little bit Chernobyl – the reactor is going critical! Our cozy assumptions about how the interconnected globalized economy was supposed to work are being rocked to the core.”
As consumers we may feel the impact more than we originally thought. “Russia is a major supplier of oil, gas, and metals, and, together with Ukraine, of wheat and corn. Reduced supplies of these commodities have already driven their prices up sharply,” the IMF says. “The broad picture here is that the euro area economy is slowing pretty rapidly because you have much higher inflation that is beginning to weigh on incomes and on consumption, and … energy prices are weighing on producers. Then on top of that you have a whole bunch of supply chain issues … that have been amplified by the war in Ukraine,” according to one expert.
The impact on food prices may be significant. The Ukraine–Russia region is seen as one of a small handful of global “breadbaskets” (or major food producers) and plays a vital role not only as an exporter of primary staples like wheat, but also as one of the major suppliers of fertilizer worldwide. According to the experts, there are six breadbaskets that together supply roughly 60 to 70% of global agricultural commodities. The Ukraine–Russia region is responsible for roughly 30% of global exports of wheat and 65% of sunflower, in a context where those markets are increasingly tight and interconnected—so a slight disruption in supply creates some impact on price.
This instability will start to create what the experts describe as a “whiplash effect” in the food supply chain, having clear secondary effects on other breadbaskets, like Brazil. Global prices for some grains have spiked since the Russia-Ukraine war started, with both countries contributing a significant percentage of the world’s supply for some of those commodities such as wheat.
While it may appear that Russia clearly intended to destabilize the global economy it cannot be for certain if only because Russia stands to lose more from this type of destabilization. On the other hand, it also does not mind if the world finally recognizes it as aa major source of energy and agriculture-related products. One economist said that one of the worst results from the Covid pandemic was the uncertainty of the future economic state. “To now add the Russian war clearly puts the world economies in limbo at a time when they were supposed to be in a recovery mode.
Walking the aisles of a supermarket these days can give you somewhat of a picture of what we face. The sheer number of products that depend on wheat and corn, for example, can quickly demonstrate how much we have riding on food prices as a result of the Russian invasion. This will only compound some of the supply chain issues since these products will no doubt be more scarce and even when they are available much more costly. One can only speculate whether a major aim of Vladimir Putin was to destabilize the economies of the world and show people who is really boss. The next few months will be crucial and we may get the answers to some of the questions that are being raised about the economy.