Sign up for Powell Tate Insights for monthly fresh takes on disruptions, innovations and impact in public affairs.
Menu
The war in Ukraine will cause global economic headwinds in the second quarter and beyond, further undermining economic recovery and hitting the poorest regions and countries the hardest.
Here are some trends to watch in the weeks ahead:
The conflict will impact global growth.
The International Monetary Fund (IMF) recently downgraded its global economic forecast of 4.4 percent growth for 2022 and a revised estimate is expected when the IMF holds its annual meetings this month. Global inflation will likely rise above 6 percent this year, driven by higher commodity prices for energy, food and metals.
As inflation is further triggered by economic disruptions related to the war, new challenges await central banks. The Federal Reserve and other monetary agencies are raising interest rates to counter inflation — and now, need to monitor for a slowdown in growth that could alter their decision making.
European institutions and national governments will increase public spending to ensure continued economic growth.
The European Commission will relax EU rules on state aid so national governments can assist companies negatively impacted by high energy prices, sanctions against Russia and an increase in geopolitical uncertainty. The EU will start to implement a plan to replace Russian natural gas with imports from other sources, including the United States, double production of biomethane and increase the production and import of renewable hydrogen.
Land, air and sea trade routes across the Eurasia region are disrupted because of the conflict, creating supply chain challenges for commodities and industrial goods.
Russia’s neighbors, especially in Central Asia, are highly dependent on Russia for trade, remittances, financial transactions and other economic activity. For its part, the Russian economy is already contracting significantly under Western sanctions and boycotts, threatening long-term growth prospects, although revenues from oil and gas exports continues to flow in.
High food and fertilizer prices will threaten the stability of fragile economies.
A crucial portion of the world’s wheat, corn and barley is trapped in Russia and Ukraine. Fertilizer stocks are mired in Russia and Belarus. The impact will be greatest in countries in Africa and Asia that depend on food imports from Ukraine and Russia, as well as fertilizer importers such as Brazil and India.
Many African countries will struggle to cope with potential food shortages and price shocks, which may lead consumers to protest higher prices of everyday goods. In addition, the urgent humanitarian response in Ukraine means the international community may divert attention and resources from Africa’s aid and development needs. Rising food and transport costs are creating additional challenges to the UN’s World Food Programme, which reports their costs have gone up by 30 percent since 2019.
The conflict in Ukraine underscores the fragility of global food markets and the need for innovation and commercialization of alternative food products, circular and regenerative farming — as well as the need to reduce food waste.
Energy shortages and rising prices are already creating the greatest demand disruption since the 1970’s oil shock.
This could trigger an acceleration in decarbonization in some countries. It could also lead to delays in the clean energy transition the world needs to move toward net zero carbon emissions. The crisis illustrates the need for major new investments and innovation in alternative energy sources such as hydrogen.
Some governments in Latin America could realize short-term benefits from higher prices for exports of agricultural products, oil and metals.
But slower global growth and higher inflation will create economic, and therefore political, challenges across the region. South America has been one of the hardest hit regions since the onset of COVID-19. Even if higher export earnings help governments rebalance their budgets, consumers will pay more for food and fuel.
A longer trend to watch is reduced global businesses confidence, higher investor uncertainty and a slowdown in global trade and cross-border investments.
Russia is threatening to nationalize Western companies that have left the country. These impacts will eventually weigh on corporate performance, investor risk, and already volatile asset prices, which in turn, will tighten financial conditions, slow growth and potentially spur capital outflows from emerging markets.
Author
International consultant to governments, multinational corporations, and foundations on global economic, trade, development, and climate issues.
Sign up for Powell Tate Insights for monthly fresh takes on disruptions, innovations and impact in public affairs.