March 23, 2022 (MLN): The entire global economy will feel the effects of slower growth and faster inflation triggered by Russia's invasion of Ukraine, the International Monetary Fund (IMF) said in its latest post.
Beyond the suffering and humanitarian crisis from Russia’s invasion, the world will suffer a big blow in the face of lower growth and soaring prices.
Impacts will flow through three main channels. One, higher prices for commodities like food and energy will push up inflation further, in turn eroding the value of incomes and weighing on demand. Two, neighboring economies, in particular, will grapple with disrupted trade, supply chains, and remittances as well as a historic surge in refugee flows. And three, reduced business confidence and higher investor uncertainty will weigh on asset prices, tightening financial conditions and potentially spurring capital outflows from emerging markets.
Russia and Ukraine are major commodities producers, and disruptions have caused global prices to soar, especially for oil and natural gas. Food costs have jumped, with wheat, for which Ukraine and Russia make up 30 percent of global exports, reaching a record.
Beyond global spillovers, countries with direct trade, tourism, and financial exposures will feel additional pressures. Economies reliant on oil imports will see wider fiscal and trade deficits and more inflation pressure, though some exporters such as those in the Middle East and Africa may benefit from higher prices.
On March 11, the IMF had already expected to cut its global growth estimate due to the economic damage caused by Russia's invasion of Ukraine, Managing Director Kristalina Georgieva said.
In January 2022, the fund cut the global growth forecast for 2022 to 4.4 percent due to the negative impacts of the Omicron variant of Covid-19, after worldwide GDP rose by 5.9 percent last year.
The IMF is due to publish an updated World Economic Outlook next month which will include “a downward revision of our growth projections,” she said.
According to the report, the steeper price increases for food and fuel may spur a greater risk of unrest in some regions, from Sub-Saharan Africa and Latin America to the Caucasus and Central Asia, while food insecurity is likely to further increase in parts of Africa and the Middle East.
The report stated that the toll is already immense in Ukraine. Unprecedented sanctions on Russia will impair financial intermediation and trade, inevitably causing a deep recession there. Energy is the main spillover channel for Europe as Russia is a critical source of natural gas imports. Wider supply-chain disruptions may also be consequential. These effects will fuel inflation and slow the recovery from the pandemic.
Beyond Europe, the Caucasus and Central Asia nations will feel greater consequences from Russia’s recession and the sanctions. Close trade and payment-system links will curb trade, remittances, investment, and tourism, adversely affecting economic growth, inflation, and external and fiscal accounts.
In the Middle East and Africa, major ripple effects from higher food and energy prices and tighter global financial conditions are likely. In addition, worsening external financing conditions may spur capital outflows and add to growth headwinds for countries with elevated debt levels and large financing needs.
Many countries in Sub-Saharan Africa are particularly vulnerable to the war’s effects, specifically because of higher energy and food prices, reduced tourism, and potential difficulty accessing international capital markets.
Food and energy prices are the main channel for spillovers in the Western Hemisphere, which will be substantial in some cases. High commodity prices are likely to significantly quicken inflation for Latin America, the Caribbean, and the United States.
In Asia, the biggest effects on current accounts, as per the report, will be in the petroleum importers of ASEAN economies, India, and frontier economies including some Pacific Islands. This could be amplified by declining tourism for nations reliant on Russian visits
For China, immediate effects should be smaller because fiscal stimulus will support this year’s 5.5 percent growth goal and Russia buys a relatively small amount of its exports. Still, commodity prices and weakening demand in big export markets add to challenges.
Meanwhile, spillovers are similar for Japan and Korea, where new oil subsidies may ease impacts. Higher energy prices will raise India’s inflation, already at the top of the central bank’s target range.
Asia’s food-price pressures should be eased by local production and more reliance on rice than wheat. Costly food and energy imports will boost consumer prices, though subsidies and price caps for fuel, food and fertilizer may ease the immediate impact—but with fiscal costs, the IMF noted.
Copyright Mettis Link News
31623
