Global Economy Faces Sharp Deterioration Amidst Ukraine Crisis

Strategic Insights -

The global economy, which was expected to recover from the Covid-19 pandemic by the end of 2022, is now facing a sharp deterioration due to the ongoing crisis in Ukraine. The war has imposed a severe stagflationary shock, raising prices as energy supply is threatened and squeezing household incomes as commodities become more expensive. The return of coronavirus in China has amplified upward pressures on prices and downward pressure on output. With geopolitical and pandemic risks becoming a reality, policymakers are being forced to pivot towards a more gloomy outlook.

Key Takeaways:

  • The global economy was expected to grow at a rate of 5% in 2022, but due to the Ukraine crisis, the markdowns to this year's growth outlook may need to be denominated in percentage points, according to Nathan Sheets, global chief economist at Citi.
  • The war in Ukraine has a real difference between US and Russian gas prices, with Europe being more dependent on Russian gas, resulting in a 1.4 percentage point hit to Europe's economy in 2022, according to the OECD.
  • The conflict has led to disruptions in supply chains, energy scarcity, and inflation, with Herbert Diess, chief executive of Volkswagen, stating that the war risks being "very much worse" for the European economy than the pandemic.
  • The worst-case scenario modelled by economists is if Russian energy supplies to Europe are cut off, which could result in a 2.2% hit to production and trigger a eurozone recession, according to Jan Hatzius, chief economist of Goldman Sachs.
  • The US economy is running too hot, with unemployment at 3.8% in February and inflation at a multi-decade high, with the Fed signalling six more interest rate rises this year and three more in 2023 to slow the economy.
  • Fiscal policy is likely to be better suited to restoring confidence in economic structures, with Reza Moghadam, chief economic adviser at Morgan Stanley, stating that governments should use fiscal policy to offset the impact on trade and confidence from higher energy costs.

Statistics:

  • 5%: global growth expected in 2022 before the Ukraine crisis
  • 1.4 percentage point: hit to Europe's economy in 2022 due to the conflict
  • 2.2%: potential hit to production if Russian energy supplies to Europe are cut off
  • 3.8%: unemployment rate in the US in February
  • 7.9%: inflation rate in the US in February
  • 3%: potential interest rate in the US to make monetary policy restrictive
  • PS70bn: potential cost to the UK economy of a ban on Russian energy
  • 3 million: number of refugees expected to cross the Ukrainian border

Sources:

  • This is Money
  • Financial Times
  • Bloomberg
  • Reuters
  • OECD