Conflict in Ukraine has negatively changed the global economy in less than a month. Just 30 days ago, before the war started, the Russian economy was one of the largest economies in the world, it was a key supplier area of commodities, particularly energy and food.
The war in Ukraine represents a challenge for the global economy harming growth and putting upward pressure on inflation when inflation is already at high levels. Ukraine is not a significant trading partner for any major economy, but countries such as China, US, Germany, France, and Italy represent some of the major import partners for Russia.
There are several channels through which the conflict impacts on the world economy. The Ukrainian and Russian economies are key suppliers of commodities, including titanium, palladium, wheat, and corn. Disruptions to the supply chain of these commodities would keep prices high, intensifying for users of such commodities (including car, smartphone, and aircraft makers).
Secondly, significant escalation on energy prices due to Russia being one of the world’s largest oil producers and energy exporters, will lead into higher inflation.
Strong international economic sanctions on trade to Russia, which are more severe than the ones imposed in 2014, are another channel through which the global economy is hampered.
Another channel is the large-scale emigration from Ukraine; the UNHCR says there could be 4 million refugees as the crisis unfolds.
The European Union is the most vulnerable of the major economies, given trade links, reliance on Russian energy to meet more than 60 per cent of its energy needs and the dependence on food supplies.
Markets will be watchful for any sign of default or liquidity problems for firms with strong links to Russia.
In addition, the conflict is expected to increase military spending in NATO. Both defence and refugees’ assistance expenditures are likely to add pressure on resources and therefore inflation.
So lets wait…
- More pain at the pump
- inflation
- Market turbulence
- Slower economic growth
- bigger borrowing costs
- Cyberattacks