Jul 5, 2022
Ukraine war: its effect on the global economy
War was the last thing that the Global economy needed
Two pillars of the post-world-war-2 order were globalisation and international trade; both ensured that countries’ economies became interdependent, and it worked well because China and other developing countries grew by leaps and bounds because of their export-oriented economy.
But the order worked well during peace, and countries are aware that the interdependence of economies may work against them during a war.
The Russia-Ukraine conflict has taken the shape of a major conflict and has, directly and indirectly, affected several countries. The conflict is one of the worst wars that Europe has seen after World War-2.
This piece will discuss how the Russia-Ukraine war affects the global economy?
The war came in the background of a battered global economy thanks to COVID. The countries were gradually restoring their economies to pre-pandemic levels, but the war has pulled them back into a path of economic slowdown.
Inflation and supply bottlenecks were already plaguing the economies before the war further brought down the economies.
War affecting different countries
Countries — Eastern Europe, the South Caucasus, and Central Asia — deeply tied to the Russian economy because of their direct trade and migration are the worst affected.
War has increased the possibilities of acute Financial stress across emerging market and developing economies [EMDEs], de-anchoring of inflation expectations, and widespread food and energy insecurity.
In 2021, the global growth was tottering at 5.5%, which was expected to shrink to 4.1% in 2022 and 3.2% in 2023. The decline accounts for COVID waves, cooling of pent-up demand, reduced monetary and fiscal support and lingering supply disruptions.
By the end of 2021, EMDEs’ debt run up was worsening; fiscal deficits and Current account deficit (C.A.D) were deteriorating, and the war exacerbated the economic situation of EMDEs.
Several economies in Europe and Central Asia [ECA] have been stifled because of their trade, migration, remittance, supply chain and transport links to Russia and to some extent, Ukrainian economies. High energy prices are driving up electricity and heating expenses for people.
Overall growth in ECA, excluding Russia and Ukraine, is set to fall to 2.2% in 2022 from 7.8%.
Energy and commodity prices
Russia is the world’s largest wheat exporter: it exports 18% of global exports; Ukraine accounts for 7% of global wheat exports. Russia is also the largest exporter of natural gas (25%), palladium 23%, nickel 22% and fertilisers 14%. It exports 18% of coal, 14% of platinum, 11% of crude oil and 10% of refined aluminium.
Ukraine exports 2/5th of global oilseed production; Ukraine is the 4th largest exporter of corn, accounting for 13% of global exports.
Energy and agriculture commodity prices have risen since the war: coal prices by 60%, European Natural gas by 30%, wheat by 40%, brent crude oil prices have increased to $130 per barrel, although the price has decreased recently.
Russia& Ukraine constitutes 75% of imports of wheat in many countries — Europe and Central Asia, Middle East and North Africa and Sub-Saharan Africa;
90% of Ukraine’s grain trade flows through the Black seaport, which is now closed. If Russia-Ukraine doesn’t start exporting food, the world may see hundreds and thousands of people starving to death.
The inflation rates going through the roof have affected the growth prospects of countries, especially, the developing ones.
Inflation and war
Central banks of different countries have increased interest rates that will slow the economic growth in those countries. But the central banks don’t have an option since inflation is breaking decades records in several countries..
Inflation is eating away the purchasing power of the currencies, and firms aren’t going to hike employees’ salaries at a rate that matches the inflation rate.
The economically weaker section is hit hardest by the price rise. Countries’ budget figures have taken a beating because of the war, which had already weakened by the pandemic.
The state of the global economy reminds me of a situation in cricket: when a team is already 4 wickets down, the batsman hits the ball straight down past the baller, and the baller manages to get a finger on the ball that hits the wicket at the non-striker’s end, and the non-striker is caught outside the crease and is run out.
It would be the worst way to get out, but what makes it worse is losing a wicket when the team has already lost 4 wickets.
The pandemic had already put the economy in a four-wicket down situation, and the war made it even worse by knocking out a wicket in a way which usually doesn’t happen in cricket. The last thing that the world wanted was a war, yet it got a war.
