Russian invasion of Ukraine could send the battered global economy into recession
- A Russian invasion of Ukraine and the sanctions such a move would elicit could destabilise global trade, causing untold economic damage
- After two years of economic downturn and supply-chain disruptions, the world needs a chance at crisis-free recovery, which means peace is essential
The world economy is still in a state of fragile recovery from the Covid-19 pandemic and the last thing it needs is the shock of a serious conflict in Ukraine. The stakes are high, tensions are increasing and the damage to global economic confidence would be incalculable.
The world needs every opportunity for crisis-free recovery at the moment. After the pandemic-driven downturn in 2020 and the related supply-chain shortages last year, the global outlook is still under a cloud. Economic morale is slipping, with the J.P. Morgan/IHS Markit global manufacturing purchasing managers’ index edging back to 53.2 in January, a 15-month low for factory activity.
The global PMI has signalled growth for 19 successive months but the outlook is less settled. The US and Europe are seeing continued expansion but at a weaker pace, while manufacturing activity in China is on the verge of contraction.
The supply-side scramble for production goods, raw materials and energy supplies following the 2020 downturn has been a major factor behind the spike in global prices in recent months.
But there could be worse to come if the global supply chain is disrupted by a bigger crisis erupting in Ukraine. Punitive sanctions on Russia could lead to the flow of natural gas to Europe being severely restricted.
Russia supplies as much as 50 per cent of the European Union’s gas imports, so any cutbacks there could lead to serious consequences for global energy prices. Europe would be forced to turn to alternative suppliers, adding extra strain on an already overburdened global energy market.
The US Federal Reserve is already behind the curve on monetary tightening with headline inflation hitting 7 per cent in December, raising doubts whether its median long-term target of 2.5 per cent Fed funds will be enough to keep a lid on inflation risks further ahead.
The big issue is how far global natural gas prices could spike in the event of a serious Russian incursion in Ukraine. A return towards the 2005 highs of around US$14 per metric million British thermal unit (MMBtu) could mean an additional tripling of gas prices from current levels of around US$4.50 per MMBtu, with serious consequences for global inflation.
The contagion risks could be catastrophic across the board. Whether central banks react to a bigger spike in energy prices and inflation with knee-jerk interest rate hikes, or alternatively attempt to quell financial market turbulence with lower rates is debatable.
The prospect of a jump in financial market volatility and risk aversion would be dire for equity and credit markets. Consumer and business confidence would be badly affected too. Financial wealth perceptions would dive, consumer spending and business investment intentions would struggle and growth expectations would be seriously undermined.
Cool heads called for amid Ukraine crisis
The January forecasts from the International Monetary Fund seem reasonably optimistic, but still foresee a gradual slowdown of global growth from 5.9 per cent in 2021, to 4.4 per cent for 2022 and 3.8 per cent for 2023.
Heightened uncertainty, higher inflation and a tougher interest rate response by central banks could easily knock one percentage point off annual global growth forecasts in the next few years. A Ukraine invasion, of any magnitude, might stop global growth in its tracks.
The stakes are too high. It’s time to give peace a chance.
David Brown is the chief executive of New View Economics