WINDHOEK, Mar. 2 – The immediate global implications will be higher inflation, lower growth and some disruption to financial markets as deeper sanctions take hold. The longer-term fallout will be a further debilitation of the system of globalized supply chains and integrated financial markets that has dominated the world economy.
The pandemic has left the world economy with two key points of vulnerability high inflation and nervous financial markets. Aftershocks from the invasion could easily worsen both. Just how big a blow the conflict ends up delivering to the global economy will depend on its length and scope, the severity of Western sanctions, and the possibility that Russia might retaliate. There’s the potential for other twists too, from an exodus of Ukrainian refugees to a wave of Russian cyber-attacks.
Furthermore, a prolonged conflict, tougher Western response and disruptions to Russia’s oil and gas exports would deliver a bigger energy shock and a major blow to global markets. Russia – Ukraine unrest is contributing to some of the highest prices for commodities such as oil, wheat and fertilizer, plaguing a global economy already experiencing high inflation.
Russia – Ukraine unrest carries huge risks for a world economy that’s yet to fully recover from the pandemic. Countries everywhere will feel the impact of commodity-price spikes, which include food staples like wheat as well as energy. Some, like Saudi Arabia and other Gulf oil exporters, might benefit. But for most emerging markets already suffering slower recoveries the combination of higher prices and capital outflows could deliver a major blow.
Head of Research Relations at Al Jazeera Media Network Thembisa Fakude says the conflict between Russia and Ukraine is likely to affect Africa in many ways, particularly the economy. Fakude says the conflict will affect Africa in terms of oil supply. On the 25 February 2022, for the first time in seven years, a barrel of crude oil passed the $100 mark indicating tough times ahead for African countries. With tensions between Russia and Ukraine escalating, and war looking more likely than ever, traders have yet to fully recognize the risks a conflict would pose to the commodities market, particularly natural gas, wheat, and corn. A potential conflict could raise the possibility of disruptions to commodity flows. These energy-price increases will negatively affect the global economy. Oil-importing countries will experience a headwind from higher prices.
The medium- and long-term consequences for the global economy of Russia-Ukraine unrest will depend on choices. More broadly, uncertainty is never good for the economy.
In this case, of Ukraine – Russia unrest will likely drive up the already-high cost of living in the world, rattle investment and slow down the economic recovery. Supply is already failing to keep up with demand and investors are on high alert for any further supply shortfalls that could occur through in a variety of ways. Higher energy prices would make it more expensive to fly and keep transportation and input costs elevated for businesses already grappling with surging expenses. Businesses would most likely pass along at least some of these higher costs to consumers in the form of price spikes. Beyond energy, other commodities could experience price volatility. A prolonged market downturn would wipe out wealth built up by families in the market and in retirement. Market instability could also dent confidence among consumers and businesses alike. And it’s impossible to say how markets would respond in the current environment. The biggest risk to the world economy is that a prolonged crisis could tip the world into stagflation, a combination of high inflation and low economic growth.
It is tempting to think that the unrest in Ukraine will have only a minor economic and financial impact globally, given that Russia represents more or less 3% of the world economy. But policymakers need to avoid such wishful thinking. That is not as dramatic as the impact to inflation, but it’s still significant given that the world economy has not fully recovered all the jobs lost during Covid-19. Russia produces close to 11 million barrels per day. Any possible action that targets oil exports would tighten the oil market at a time when there is already concern over falling OPEC spare capacity. The combination of higher prices and capital outflows could deliver a major blow, and exacerbate the risk of post-COVID debt crises. The conflict is also having a serious economic impact, which will worsen the longer it continues. This crisis comes at a delicate time, when the global economy is recovering from the ravages of the COVID-19 pandemic, and threatens to undo some of that progress.
The economic disruption caused by the conflict and its fallout will lead to a churn in international financial markets as investors rebalance portfolios to account for changes in risk. The conflict comes at a time when private consumption remains weak and global supply chain disruptions have pushed up prices of key intermediates in manufacturing. And it’s not just the rate of inflation which matters, but also people’s expectations that it will rise further. This can spark a salary-price spiral, where people demand higher salaries to compensate for the higher cost of living, forcing companies to increase prices further across the board to pay for the salaries rises.
In conclusion, depending on what happens, the most significant effects on the global economy may manifest themselves only over the long run. The crisis is also contributing to a reassessment of the global economy’s structure and concerns about self-sufficiency. The pandemic has already highlighted the downsides of far-flung supply chains that rely on lean production. – by Josef Kefas Sheehama
