War in Ukraine: what are the threats to the global economy? – 03/11/2022 at 15:00

The world economy, still reeling from Covid-19, is again threatened by the war in Ukraine and the explosion in commodity prices, which did not live up to hopes for the beginning of the year.

(Illustration) (AFP/LOIC VENANCE)

(Illustration) (AFP/LOIC VENANCE)

Will recovery be nipped in the bud?

“The war began at a time when Europe and the United States were recovering beautifully,” said Jacob Kierkegaard, a member of the German Marshall Fund think tank in Brussels.

In just two weeks, a Russian invasion “significantly increases” the risks, European Central Bank President Christine Lagarde admitted on Thursday. Eurozone growth forecast for 2022 cut by 0.5 points to 3.7%. The International Monetary Fund (IMF) also warned on Thursday that it would cut its next forecasts, and ratings agency S&P Global predicted a 0.7 point drop in global growth to 3.4% due to an expected collapse in Russian GDP and energy prices.

Between the impact on the energy bill, the admission of refugees and budgetary support, the war should cost the European Union up to 175 billion euros, Jean-Pisani Ferry, an economist at the Brueghel Institute, calculates. According to Mr. Kierkegaard, this is not enough to warn of a major recession, which foresees a greater risk of stagflation, a phenomenon that occurs when low growth is accompanied by high inflation.

Why are prices rising?

This inflation has been resilient throughout the year, first linked to disruptions in supply chains, now linked to exploding commodity prices, putting pressure on firms’ production costs and households’ purchasing power. “We are facing an oil shock, to which is added a gas shock, an electric shock. We have never seen such a coincidence, and we are talking only about energy,” says Thomas Pellerin-Carlin, director of the energy center at the European Jacques Delors Institute.

Asked in Congress by the head of the US Central Bank (Fed), Jerome Powell, said that each $10 increase in oil reduces growth by about 0.1 points and adds 0.2 points to inflation. In the US, inflation has just been recorded at 7.9% in February.

In addition to oil and gas, many components of the economy are jumping: aluminum, nickel, wheat, corn… Russian President Vladimir Putin himself on Thursday warned about the boomerang effect of sanctions against his country and the resulting inflation.

The outbreak has affected most sectors, from oil-based glass to nickel-powered electric batteries, through aluminum-reliant aviation, or gas-powered factories. For example, steel plants have already closed in Spain, and in general, heating, moving or eating are becoming more expensive.

In Egypt, “bread prices have gone up a lot!” Omar Azzam, a 31-year-old Cairo resident, tells AFP, which has jumped 50% since the Ukrainian invasion. The world’s first wheat importer, Egypt has reduced the weight of its subsidized pancakes to the most modest and is considering raising its price, the first since the 1977 bread riots.

On the way to new massive support plans?

Popularized by former ECB President Mario Draghi, the phrase “whatever it takes” or “whatever it takes” has given rise to a historic budget plan in Europe in 2020, accompanied by shared debt.

The United States adopted several major plans, and Japan adopted a third plan in November. But with public finances deteriorating, aid should be more targeted this time around to help victims of inflation, an initiative envisaged on Thursday by G7 members on gas. In France, Economy Minister Bruno Le Maire has rejected a proposal for a second program “at any cost” two years after the Covid-19 health crisis that dramatically increased government spending.

When it comes to business, investors don’t expect setbacks, just “light stress,” said Christophe Barro, chief economist at investment firm MarketSecurities. On the other hand, developing countries, which are more vulnerable to inflation, may face a weakening of their position, and sometimes even their political stability.

Is the pandemic still a threat to the economy?

China, the factory of the world, is still fighting the coronavirus. He just reconfigured 9 million inhabitants and he may have to go further. “If this happens, the economy will slow down sharply, they will close everything they can. This uncertainty is at least as great as the war,” Jakob Kierkegaard warns.

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