After two years of growth interrupted by Covid-19, the war in Ukraine now threatens the global economy, even as the pandemic continues.
“Summing up, we have the tragic impact of the war on Ukraine. Russia is experiencing a significant downturn and we see that this is likely to affect our outlook for the global economy.” said Kristalina Georgieva, Managing Director of the IMF, on Thursday, March 10.
She has already indicated that next month at the spring meetings of the International Monetary Fund and the World Bank “Global Growth Forecasts” however, no numbers. In January, the IMF forecast was already cut to 4.4% for 2022 from 4.9% in October and almost 5.9% last year.
For its part, the ECB announced on Thursday, March 10, the reduction its eurozone growth forecast for 2022 by 0.5 points, from 4.2% three months ago to 3.7% now.
Russian default ‘more unlikely’
Regarding the impact of the war on Russia, the head of the Fund indicated that the sanctions “unprecedented” imposed by the allied countries, lead to “a sharp contraction of the Russian economy” and even a “deep recession”. She described the consequences in Russia, from a massive depreciation of the currency, which causes inflation, to a sharp drop in the purchasing power and living standards of the vast majority of the Russian population. “The spillovers to neighboring countries are also significant, especially to countries that are more closely integrated into the Ukrainian and Russian economies,” with reference to the countries of Central Asia, Moldova and the Baltic countries.
Late payment from Russia “is no longer an incredible event”, she continued, noting that the problem is not the availability of money, but the inability to use it, since the country is cut off from the world financial system. Already on Tuesday, March 8, the Fitch rating agency pointed to this risk when it announced a downgrade of the country’s long-term debt rating from “B” to “C”, which means that the risk of sovereign default is its eyes, “imminent”.
In the United Kingdom, growth could fall to 1.9% in 2022 from 7.5% in 2021.
In the United Kingdom, growth in 2022 is also threatened by war and inflation. This dark horizon is somewhat cleared up by the January gross domestic product (GDP) data released this Friday, March 11, by the National Statistics Office (ONS). +0.8% after falling -0.2% in December due to the wave of the micron variant of Covid-19 and the restrictions imposed.
However, despite this rebound, “Growth momentum is likely to be interrupted by the conflict in Ukraine, with higher and more volatile commodity prices and shortages of basic materials, which will affect production and drive up inflation,” warned Yael Selfin, an economist at KPMG. And add: “High level of uncertainty, tighter financing conditions” with rising interest rates, “and trade disruptions could reduce growth to 3.3% this year and 0.8% next year,” according to her.
This is a big slowdown compared to the 7.5% recovery in the UK economy in 2021, the strongest growth in the G7, after the previous year’s historic 9.4% contraction due to the pandemic, also the strongest in the G7.
Economic think tank CEBR is even more pessimistic. “Rising cost of living, falling consumption and exports due to sanctions against Russia” Growth could drop to 1.9% this year and zero next year, he said.
At the same time, analysts agree that inflation will easily exceed the latest estimate of the Bank of England, which in early February predicted a peak of 7.25% in April. Paul Dales of Capital Economics says the government can afford to borrow more “to soften the blow to household purchasing power”without undermining its fiscal balance goals. UK really “Ukraine is not as exposed to the economic consequences of the war as the rest of Europe,” in particular because the hydrocarbon-producing country is less dependent on Russian energy than other countries, he recalls.
In China, sustaining high growth is already seen as a daunting task.
This Friday, March 11, China’s prime minister warned that it would be difficult for the country to “maintain” strong growth in 2022. The Asian giant was already preparing in early March to slow down its growth with a target of “about 5%. 5%” this year compared to +8.1% in 2021. This would be the weakest for China, outside of the Covid period, since the early 1990s.
The concerns are still relevant. “On a global scale, sustaining medium to high growth for an economy of this size (like China) is a major challenge.” This was announced to reporters by Chinese Prime Minister Li Keqiang. In connection with the global pandemic, the outbreak of the epidemic in China and the war in Ukraine, “The economy faces new downward pressure” he warned. The Prime Minister did not explicitly mention these factors, but referred to “various complex environments that are changing and uncertainty that is increasing.”
As far as the epidemic is concerned, China continues to pursue a zero Covid policy, unlike many countries that choose to coexist with the virus and lift restrictions. If the Chinese strategy allowed the country to recover quickly from the first epidemic shock, Covid zero comes with a high social and economic cost.
When asked on the sidelines of the parliamentary session, the prime minister did not answer what impact the war in Ukraine could have on the Chinese economy. China is the first trading partner of Ukraine, considered the breadbasket of Europe. In particular, the country supplies the Asian giant with almost a third of its corn imports.