- The direct impact on global GDP was limited
- Impact on trade, energy trends still unclear
- Escalation, tougher sanctions push themselves under the risks
Feb 10 (Reuters) – A year of war in Ukraine has already dented world prosperity. But its deeper ramifications will be felt as the conflict feeds into shifts that were reshaping the global economy before Russia’s tanks rolled in.
Most directly, the war added new uncertainties to the economic trauma of a COVID-19 pandemic, which had already resulted in record soaring government debt, inflationary cost-of-living crises and labor shortages in key sectors.
Economic sanctions against Moscow came as barriers to world trade increased after an era of rapid globalization. Russia’s arming of its gas and oil exports reinforced the case for an energy transition, already made urgent by climate change.
“The shock of the demand and price wars has spread across the global economy and, combined with COVID and other policy decisions, has created these headwinds for growth,” said Robert Kahn, director of global macro-geoeconomics at consultancy Eurasia Group.
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“And I think we’re not done yet.”
The war has devastated Ukraine’s economy, shrinking it by a third, while sanctions are now beginning to starve Russia of revenues from energy and other exports. But it’s harder to quantify its impact on the rest of the world.
The European neighbors have so far been able to avoid the feared mass energy rationing and the feared wave of bankruptcies by building up fuel reserves and curbing the demand for energy, and last but not least by an unusually mild winter.
Global food and energy prices were already surging as the world emerged from the 2020 pandemic lockdowns and surging even further after war broke out, but many indices are now below their levels of a year ago.
“We find that energy prices rose more in 2021 than in 2022, suggesting that the war and sanctions were not the main drivers,” analysts Zsolt Darvas and Catarina Martins noted in a December study for the European think tank Bruegel firmly.
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NO FINAL IN SIGHT
Some may conclude that the global economy has weathered the conflict with ease. Optimism reigned at this year’s World Economic Forum in Davos as financial markets bet that advanced economies can avoid a total recession.
The International Monetary Fund now estimates that the global economy grew 3.4% last year – barely a percentage point less than forecast before the war began and before the world’s central banks targeted inflation with large interest rate hikes.
Whether global growth can now match the fund’s 2023 forecast of 2.9% remains to be seen. This newly upgraded estimate is well above the more pessimistic consensus forecast of 2.1% of private economists polled by Reuters last month.
And there are other high-stakes unknowns.
With no end in sight to the war, the main threat remains escalation, including Russia’s use of nuclear weapons on battlefields. That would take the prospects for both the world economy and general peace into uncharted territory.
The war’s impact on the energy sources that power the global economy unfolded into 2022, with an early rush towards legacy fossil fuels like coal, followed by a growing drive to invest in renewable energy, which is believed to be less vulnerable to future geopolitical shocks .
The International Energy Agency expects falling Russian oil exports to soon contribute to a plateau in global demand for fossil fuels, offering the potential for an accelerated green energy transition.
But that still requires more than the record clean energy investment of $1.4 trillion the IEA projects for 2022. The risk for the economy is that if the gaps are not filled, energy prices – and therefore inflation – will be pushed up.
What the conflict means for world trade is also unclear.
The 2007-08 financial crisis and electoral victories for pro-protectionist politicians had already interrupted a two-decade spurt of globalization, in which containerization expanded and both Russia and China entered the world trading system.
The question now is whether Western sanctions against Russia — effectively locking down the world’s 11th-largest economy — are the start of another entrenchment, as countries restrict trading partners to those they consider allies.
The World Trade Organization and others see the risk of trade fragmentation into hostile trading blocs, a scenario the IMF has modeled as losing up to 7% of global output.
A possible trigger for this could be a shift towards a broader round of secondary sanctions targeting not only Russia but also companies and investors doing business with Russia.
Eurasias Kahn said such a move – which could gain political traction as the conflict heats up – would plunge Russia into economic isolation comparable to that of Iran, which has long faced Western sanctions over its nuclear program.
“We didn’t do that because Russia is much more important and because we are concerned about the global impact of sweeping sanctions,” Kahn said.
Additional reporting by Sarah McFarlane; Editing by Catherine Evans
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