The Brutal Shock on the World Economy Due to the War in Ukraine Will Be Lasting.
The worst is yet to come.
After two years of chaos due to the COVID-19 pandemic, the year 2022 was supposed to be the year of a vigorous recovery of the world economy. Everyone wanted to believe it. Everyone probably needed to believe it too.
Now that we are not even past the middle of 2022, we already know that this year will be the year of the return of war in Europe, the energy shock, inflation, slowing growth, and volatility in the financial markets.
On this last point, it was already something I predicted at the very beginning of the year:
Jamie Dimon, the CEO of JPMorgan bank, who is currently weathering a storm over his annual bonus, summed up the situation by dramatizing as he usually does:
“A hurricane is ahead of us and you better get ready for it.”
The Russian invasion of Ukraine has caused a shock of global proportions, which is weighing on confidence. The magnitude of the shock wave is reminiscent of the 2008 financial crisis. For some ministers in Europe, the situation is “comparable in intensity and brutality” to the 1973 oil crisis.
For Ukraine, the bombing and the Russian tanks on its territory will cause its GDP to plunge by at least 30% in 2022. Russia, because of the sanctions, will see its economy shrink by about 10 to 15%.
At the global level, the IMF revised in April 2022 its growth forecast for the year to 3.6%, against the 4% anticipated in January 2022. Nevertheless, the World Bank boss is much more pessimistic, raising 5 points indicating that the world cannot escape a recession.
In the first line, the European economy is expected to grow by only 2.7% this year, instead of the 4% expected at the beginning of the year. Given the performance of the economies in the first quarter, these estimates could be downgraded again. The warning signs of a global recession are multiplying. In the rest of the world, emerging countries are being hit hard by the food price crisis, particularly in Maghreb, Africa, and Central Asia.
The blitzkrieg once imagined by Russia is getting bogged down, dragging with it economic activity, affected in parallel by the escalation of Western sanctions. This is not a temporary shock: the geopolitical situation will remain deteriorated for a long time and it is difficult to imagine sanctions being lifted, even in the event of a ceasefire.
The negative impact of the conflict is transmitted to the economy through several channels. First, it is combined with disruptions related to the COVID-19 pandemic, which have not all been resolved. As we see with the new confinements in China, the logistics production and supply chains continue to be under stress from this dual effect, whereas an improvement was expected during 2022.
The main shock is energy. While everyone agrees that Russia is an economic dwarf in the world, everyone also admits that it remains very powerful in terms of raw material and energy exports. Vladimir Putin knows this very well, and he plays on it.
As the world's second-largest exporter of oil and supplier of 40% of the gas consumed by Europe, Russia has been sidelined and its oil prices have soared. The price of oil has almost doubled from around 70 dollars a barrel at the end of 2021. Some forecasters see it rising to 180 dollars:
At the same time, gas prices have increased sixfold.
Other industrial raw materials (nickel, palladium, etc.) are contributing to the surge in production costs. While the price of wheat (30% of world exports come from Russia and Ukraine) or fertilizers threatens a global food crisis.
All this has added fuel to a pre-existing inflationary surge. The peak expected by the central bankers for the beginning of this year keeps shifting. At an average of 8% in the United States and the eurozone - and even up to 15 or 20% in some member countries - the rise in prices is creating a shock to purchasing power, which is depressing the morale of households and employers.
Governments, over-indebted after the pandemic, can no longer afford to provide unlimited support for demand. For their part, central banks everywhere are committed to monetary tightening to fight inflation, even if this means weakening growth.
The brutal and lasting shock facing the global economy has everyone paradoxically fearing both inflation and recession.
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