Moody’s expects Russian ‘economic catastrophe’ to slow global growth

The credit rating agency Moody’s predicted that the “economic catastrophe” that Russia will suffer due to the West’s retaliation for its invasion of Ukraine will slow down the growth of the global Gross Domestic Product (GDP), mainly due to the effect of rising energy prices and raw materials. cousins.

A team of company analysts analyzed in a virtual session the macroeconomic impact of the war in Eastern Europe, which according to their base scenario they expect will reduce global economic growth to 3.4% year-on-year this year and in the worst case to 2 %, while the previous expectation in February was 4%.

This scenario contemplates the possibility that Russia occupies a large part of Ukraine and military tensions decline within a year, that its economy and financial system are isolated from the rest of the world by sanctions, and that Russian crude exports are reduced to 1.5 million barrels per day (mbd).

If so, Moody’s believes the Russian economy will contract 13.5% this year, but in a “long conflict” it can fall 24%, which would happen if there is a complete invasion of Ukraine and that produces greater sanctions that cut its crude oil exports up to 3.5 mbd, causing great “tumult” in global supply chains.

The eurozone takes, in any case, a “major blow”, since I was optimistically expecting the recovery from the COVID-19 crisis and now there is a “cloak of negativity” in the markets, which is why they lowered the expectation of GDP growth from 4% to 3.4% this year, and in the worst case scenario to 1.5%.

In that sense, they pointed out that the inflation perspective of the eurozone has “deteriorated” because it is “incredibly dependent” from Russian energy imports, especially natural gas, making it difficult to diversify, and the economy was already facing price pressure before the invasion.

In the United States, less exposed, they estimate that the effect of the conflict will be “moderate” and the GDP forecast is lowered from 3.7% to 3.5% this year, largely because there is a “excess” savings in households derived from the time of the pandemic, which they believe will “cushion” the sharp rise in energy prices.

For every US$10 increase in the price of a barrel of oil in Texas, which would break even at US$75, according to experts, a gallon of gasoline increases by 30 cents, which has led to the price of this fuel at the pumps has already risen to a historical record.

Meanwhile, they felt that commodity markets are very “destabilized” with regard to widely consumed agricultural products such as wheat or corn, of which Russia and Ukraine are major exporters, which will especially affect the cost of living in emerging countries.

The rise in the price of raw materials will also have an impact on the supply chain, which was already subject to “stress” since the delta variant appearance of the coronavirus, and they may arise “vulnerabilities” derived from components such as nickel, aluminum or neon gas, used to make semiconductors.

On the positive side, the analysts clarified, the war and the consequent escalation in the prices of fossil energy could suppose a “opportunity for Europeans to come together and push renewable energy at a faster pace”.