MacroscopeUkraine crisis on top of Covid-19 pandemic is one shock too many for the global economy

Name: Oil prices skyrocket around the world as result of Russia-Ukraine conflict, sanctions
Uploaded: 2022-03-21T14:30:16.000Z
Duration: 2 min 11 s
Description: Oil prices skyrocket around the world as result of Russia-Ukraine conflict, sanctions

Covid-19, US-China decoupling and sanctions on Russia have dealt a collective blow to globalisation, most of all at the expense of developing economies

Supranational agencies like the IMF and World Bank must fulfil their role not only in offering development assistance but also in preserving peace and stability

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Wheat is loaded onto a bulk carrier at the Port of Geelong in Victoria, Australia. Wheat prices soared to their highest level since 2008 amid fears of a global shortage as the Ukraine war shuts off over 25 per cent of the world’s exports. Photo: Bloomberg

David Brown

Published: 10:30pm, 21 Mar 2022Updated: 1:29am, 22 Mar 2022

Let’s just hope that we are not about to bid goodbye to all that. Globalisation has suffered a mighty blow in wake of the Ukraine crisis, and the worry is that the age of peace and prosperity enjoyed by most major nations since the end of World War II is suddenly under threat. Our global interconnectedness has taken a step backward and hopes for seamless trade in goods, capital and labour have been badly undermined by the rapid imposition of sanctions on Russia and its wider implications for the future.

It is not just global confidence which has taken a hard knock, but also the perception that political, economic and financial stability will bounce back soon. The world may be on the verge of a new phase of potential market strife where output, trade and price stability will be less certain and subject to greater volatility. The key question is whether the global economy can withstand another shock so soon after the Covid-19 crisis.

All our expectations of high growth, modest inflation and low interest rates established over the last three decades are at risk, with the spectre of the oil-shocked, stagflation-bound 1970s and 1980s looming yet again. If the Ukraine crisis drags on much longer and higher energy prices stick, then annual global growth could easily stagnate back towards the 2-3 per cent range, compared with the 3.5 per cent long term average since the 1960s.

On the positive side, if raw material prices stay strong, commodity producers and cartels like the Organisation of the Petroleum Exporting Countries will hold the whip hand again, with a return to 1980s-style oil surpluses being recycled back into global financial markets, providing continuing support for investor exuberance. Stagflation may dominate, but with global liquidity levels riding high, stock markets will still flourish, albeit in a much more volatile environment.

The world economy has been through the wringer since the 2008 financial crash, the 2009-2012 European debt crisis and the recent Covid-19 pandemic, which have sapped global growth potential over the years. At the same time, global protectionism has been on the rise and multilateralism has been on the wane, exacerbated by the outbreak of trade tensions between the US and China in 2018, after former US president Donald Trump levied trade tariffs on Chinese goods and Beijing responded in kind with retaliatory measures of its own.

The ensuing triangle of trade tensions between the US, China and Europe in the last four years couldn’t have come at a worse moment for a world economy in dire need of a clear road to faster recovery. Barriers to trade have gone up, protectionism has spread and world trade flows have suffered at the expense of developing nations anxious for a bigger slice of global business activity to support stronger growth, faster job creation and greater prosperity.

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Oil prices skyrocket around the world as result of Russia-Ukraine conflict, sanctions

As the US-China trade war intensified, world trade growth in goods and services slowed dramatically from 3.9 per cent in 2018 to 0.9 per cent in 2019, before the Covid-19 crisis sparked an 8.2 per cent collapse in global trade flows in 2020. World trade growth subsequently recovered to 9.7 per cent last year, but the Ukraine crisis casts a dark shadow over the outlook for sustainable recovery over the next few years. It’s safe to say growth expectations will be severely downgraded this year as economic optimism fades.