Threats to the world economy from the war in Ukraine

the war in Ukraine and the rise in the price of raw materials threaten a World economy still not recovered from the crisis of the COVID-19 and represent a bucket of cold water at the beginning of 2022.

A recovery at risk?

“The war came at a time when Europe and the United States were taking advantage of an excellent recovery,” says Jacob Kirkegaard of the German Marshall Fund think tank.

In just two weeks, the Russian invasion “considerably increased” the risks, the president of the European Central Bank (ECB), Christine Lagarde, acknowledged on Thursday.

The monetary institution reduced its growth forecast for the euro zone in 2022 by half a point, to 3.7%. The International Monetary Fund (IMF) also warned that it will lower its rates.

The rating agency S&P Global predicted a decline of 0.7 points in world growth to 3.4%, due to the foreseeable fall in Russian GDP and energy prices.

The war in Ukraine could cost the European Union (EU) 175 billion euros ($192 billion) in energy prices, hosting refugees and budget support, according to Jean-Pisani Ferry, an economist at the Bruegel institute.

But Kirkegaard does not fear major recessions, but rather stagflation, a phenomenon that combines stagnant growth with high inflation.

Why do prices increase?

This inflation has been persistent for a year. Initially it was linked to the breakdown of supply chains, but now it is due to the rise in the price of raw materials, which strains the production costs of companies and the purchasing power of households.

“We are facing an oil crisis, to which is added a gas crisis and an electricity crisis. This coincidence has never been seen before”, states Thomas Pellerin-Carlin, from the Jacques Delors European Institute.

The president of the Federal Reserve (Fed), Jerome Powell, indicated that each US$10 increase in oil represents 0.1 points less growth and 0.2 more inflation. His country recorded 7.9% inflation in February.

Beyond hydrocarbons, the prices of aluminum, nickel, wheat and corn, among others, also soared.

Russian President Vladimir Putin even warned against the boomerang effect of Western sanctions against his country.

Most sectors are affected by rising prices. For example, in Spain steel plants have already been closed and, in general, heating, travel and food are becoming more expensive.

In Egypt, the world’s largest wheat importer, “the price of bread has increased tremendously,” said Omar Azzam, a 31-year-old Cairo resident. Since the invasion in Ukraine, it increased by 50%.

In general, Europe and Africa are going to be “deeply destabilized in terms of food” in the next 12 to 18 months, French President Emmanuel Macron warned on Friday during the European summit in Versailles, in particular, due to the problems of the crops. in Ukraine, especially wheat.

For their part, the G7 countries called on the international community on Friday to avoid taking measures to prevent the export of food products.

Towards new support plans?

The expression “whatever it takes”, popularized in 2012 by the then head of the ECB Mario Draghi, was translated in 2020 into a historic recovery plan for the EU, accompanied by the issuance of common debt.

The United States adopted several massive plans to support the economy, as did Japan.

But in a context of degraded public finances, aid on this occasion must be more selective and go to the victims of inflation.

As for companies, investors do not expect defaults, but rather a “slight stress”, says Christophe Barraud, economist at the investment company MarketSecurities.

In contrast, emerging countries, more vulnerable to inflation, could see their situation weaken, including their political stability.

Is the pandemic still threatening the economy?

China, the factory of the world, continues to fight against the coronavirus and has just re-confined nine million inhabitants, although it could go further.

“If this happens, the economy will slow down drastically. They will close everything they can close. This uncertainty is at least as great as the war”, warns Kirkegaard.