The world has been through the wringer since the turn of the millennium, with the 2008 global crash, the European debt crisis and the Covid-19 pandemic, but the crisis in Ukraine could well change the economic landscape for a long time. The peace premium has just gone up in a puff of smoke and this is likely to cast a shadow over global economic confidence, just at the moment recovery optimism needed persuasion that the road ahead for sustainable growth would be smooth. With market fear gauges like the Vix volatility index pushing higher and the appetite for risk plunging yet again, it’s a reasonable bet that consumer spending and business investment intentions will take a hit in the coming months. Unless the crisis can be resolved quickly, expectations for global growth this year and next will take a dive. No one will be spared from the fallout and the major economies like the United States and China will feel their share of it. The first major conflict on European soil since World War II has come like a bolt out of the blue. It’s a humanitarian disaster on a huge scale, and the shock effect on the global economy will be felt very quickly. Global confidence was already on a precarious footing, with the pandemic still taking its toll, world trade growth slowing significantly in recent months and the world’s major monetary authorities set to withdraw policy support. The US Federal Reserve’s well-flagged intention to hike interest rates possibly as soon as March has not helped matters. In the last few months, with inflation on the rise and continuing supply chain shortages dragging on demand, doubts have already begun to creep in about the sustainability of global recovery going forward. The International Monetary Fund has already downgraded its expectation for global growth this year to 4.4 per cent in its January forecast, chipping off 0.5 percentage points from its October 2021 projection of 4.9 per cent. There will be more to come as the Ukraine crisis unfolds, with Europe most at risk in such proximity to the conflict. Expectations for European growth could take a hard knock, especially for Germany, considering its strong trade ties to Russia, which will suffer as economic and political sanctions begin to bite. It’s not just the likely damage to trade flows, but the risk that Russia retaliates against international sanctions by cutting off the supply of oil and gas to European countries, which could undermine economic activity, returning the region into the grip of another recession. Why a war in Ukraine and end of cheap money add up to a market nightmare Europe is dependent on Russia for almost 40 per cent of its natural gas despite a deliberate policy shift towards renewable energy sources in recent years. Germany and Italy are especially vulnerable, with Russian gas accounting respectively for 65 per cent and 43 per cent of their gas imports. Even a temporary disruption to energy supplies could have serious implications for industrial operations, new business investment, job creation and consumer spending. Growing uncertainty in the region would cast a deep pall over growth prospects, putting the IMF’s 2022 forecast for 3.9 per cent growth for the euro area in considerable doubt. The European Union rallied extremely well after the 2020 downturn brought by the Covid-19 crisis, but there are worrying signs that economic confidence and growth momentum might have already peaked. With inflation surging once again and the European Central Bank hinting at a tougher monetary stance ahead, it could leave Europe very vulnerable to a sudden deterioration in geopolitical risks and increased global financial instability. In the worst-case scenario, the contagion effects would spread far and wide, considering the relative importance of Europe’s economy to the rest of the world. The economies of the US and China will not be immune. US economic growth this year could easily slip below the 4 per cent expected by the IMF for 2022, while China might have a very hard time achieving growth anywhere over 5 per cent this year, if global contagion risks deteriorate much further. This poses a serious dilemma for the global monetary authorities, whether they rise to the challenge of rising inflation risks or play safe by keeping interest rates steady. There are no winners here. Global economic confidence will end up a major loser. David Brown is the chief executive of New View Economics