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Russia's invasion of Ukraine on 24 February has fundamentally
changed the geopolitical landscape—with economic consequences.
Four weeks into the war, Russia continues its bombardment of
cities, encountering determined Ukrainian resistance. While the
outcome is highly uncertain, a lengthy political impasse appears
likely. Economic impact of Russia-Ukraine war on world economy and
to both countries will be substantial. Through sanctions, trade
policies, and private investment decisions, Russian economy will be
isolated for years to come. Ukraine must endure the massive
displacement of people and destruction of property.
The S&P Global Market Intelligence forecast of
global real GDP growth in 2022 has been marked down to 3.3% from
4.1% in February.
While the 2022 global growth rate represents a slowdown from
5.8% in 2021, the world economy has sufficient resilience to avert
a recession. About 0.3 percentage point of the downward revision in
2022 growth is traced to sharp contractions in Russia and Ukraine,
while another 0.3 percentage point reflects slower growth in
Western Europe, a region hit particularly hard by the surge in
prices of natural gas, oil, and electricity. Nearly every region is
hurt by war-related supply disruptions and commodity price
increases. A notable exception is the Middle East and North Africa,
where oil and gas exporters will benefit from substantially higher
energy prices.
Russian economy faces its deepest recession since the 1990s and
diminished growth potential.
In response to severe sanctions by western governments and a
mass exodus of businesses, Russia's real GDP is projected to
plummet 22% over the four quarters of 2022, reaching its lowest
level since 2006. On an annual basis, output of the Russian economy
will fall 11.1% in 2022 and 3.7% in 2023, with sharp declines in
fixed investment, private consumption, and exports. The downward
spiral began in late February when the United States, European
Union, United Kingdom, and Canada imposed new sanctions to block
the Russian central bank's access to its external assets and to
block major Russian banks from using the financial messaging
services of SWIFT. These actions triggered a collapse in the
rouble's exchange value, prompting the Bank of Russia to raise its
policy rate from 9.5% to 20.0%, its highest level in two decades.
S&P Global Market Intelligence analysts expect the rouble will
come under further pressure, forcing the central bank to raise its
policy rate to 30% in May. Currency depreciation and supply chain
disruptions will lift Russian consumer price inflation from 6.7% in
2021 to 23.6% in 2022. A difficult investment environment will
impede economic recovery—real GDP of Russia is not expected to
regain its 2021 peak until the 2030s.
Prospects for the Ukrainian economy are dire amid wartime
casualties and extensive destruction of infrastructure.
Ukraine GDP is tentatively expected to experience a contraction
of about 40% in 2022, along with a 30% surge in consumer prices
according to S&P Global Market Intelligence analysts. The
recovery pace of Ukraine economy will depend on the course of the
war, governance, international aid for reconstruction, and a return
of population. The United Nations estimates that 3.17 million
refugees (7% of the population) have left Ukraine, while nearly 2
million have been internally displaced.
The Russia-Ukraine war is exacerbating supply chain problems
and fueling inflation.
While Russia and Ukraine accounted for just 1.8% and 0.1%,
respectively, of world GDP in 2021, the two countries play an
outsized role in production of oil, natural gas, wheat, corn,
sunflower oil, fertilizer, lumber, neon gas, aluminum, nickel,
titanium, palladium, iron, and steel. Through mid-March the IHS
Markit Materials Price Index advanced 33% year to date, reaching a
new high. Prices will peak in the second quarter of 2022 and
retreat about 20% during the final two quarters of 2022 in response
to rising interest rates; softening demand growth; and the slowdown
in mainland China's property market.
Energy prices are the main transmission channel through which
the Russia-Ukraine war will affect inflation and economic growth.
The forecast assumes losses in Russian oil production and exports
of about 1-3 million barrels per day through 2023. The price of
Dated Brent crude oil is expected to retreat from USD118/barrel in
2022 to USD96/barrel in 2023 and USD87/barrel in 2024. Reflecting
regional supply dependencies, natural gas prices will be
substantially higher in Europe and moderately higher in Asia as a
result of the war.
As increase in commodity prices move downstream, global
consumer price inflation is projected to pick up from 3.9% in 2021
to 6.4% in 2022, the highest rate since 1995.
The 2022 forecast is revised upward by 1.8 percentage points.
While all regions will experience a significant pick-up in
inflation in 2022, the sharpest accelerations are in Europe, where
energy prices are soaring. The European Union (EU) imports 90% of
its natural gas consumption, with Russia accounting for 45% of that
total. Russia also accounts for 25% of the EU's oil imports and 45%
of its coal imports.
The forecast of US real GDP growth in 2022 is revised
down to 3.3% from 3.7% last month.
The markdown is driven by sharply higher prices of food and
energy, a tightening of financial conditions in light of elevated
risks, and weaker growth in export markets. Higher commodity prices
and lower stock prices will discourage consumer spending by
reducing real income and wealth. US consumer price inflation is now
projected to pick up from 4.7% in 2021 to 6.2% in 2022. After an
initial rate increase in mid-March, the US Federal Reserve will
raise the federal funds rate to a terminal range of 2.50-2.75% in
the next few years. In the current uncertain environment, a flight
to safety will help to attract capital inflows, supporting the
dollar. The US will also benefit from being the world's largest
producer of crude oil and fourth largest producer of wheat.
Among major economies, the eurozone is especially
vulnerable to inflationary shocks emanating from the Russia-Ukraine
conflict.
The forecast of eurozone's 2022 real GDP growth is revised
downward by 1.3 percentage points to 2.4%. Indeed, S&P Global
Market Intelligence analysts expect a contraction in real GDP in
the second quarter of 2022. Growth of eurozone GDP is expected to
resume in the third quarter as improving COVID-19 trends boost
services activity. Accumulated household savings during the
pandemic and potential fiscal stimulus could provide additional
support. Eurozone consumer price inflation is expected to surge
from 2.6% in 2021 to 6.9% in 2022, prompting the European Central
Bank to start raising its deposit facility rate in December. Given
the economic risks, withdrawal of policy stimulus will proceed at a
gradual pace.
Mainland China's economic growth is likely to fall
short of the 5.5% target in 2022.
The forecast of mainland China's real GDP growth in 2022 is
revised down slightly to 5.1%, reflecting the impacts of higher
energy price inflation and slower growth in European export
markets. While exports, fixed investment, and retail sales posted
strong gains in the first two months of 2022, new outbreaks of
COVID-19 variants could dampen industrial activity and consumer
spending this spring. Lockdowns have been imposed in Shenzhen,
Shanghai, Jilin, and Guangzhou. As needed, the government will
increase fiscal and monetary stimulus measures to support mainland
China GDP growth.
