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Opinion Editorials, February 2022
Russian invasion of Ukraine could send the battered global economy into recession
By David Brown
SCMP, February 7, 2022
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
A section of Gazpromís Power Of Siberia gas pipeline, which supplies gas to China, in Russiaís far eastern Amur region, pictured on November 29, 2019. Russia also supplies half of Europeís natural gas, and there are fears it could cut supplies in retaliation for US and European sanctions, should it invade Ukraine. Photo: Reuters
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.
Global growth is slowing, inflation is rising and world financial markets are in jeopardy. While the chances of a major Russian invasion of Ukraine are low, the risk of another annexation of sovereign territory, as happened in Crimea, should not be underestimated.
The threat of military action and the risk of retaliatory sanctions on Russia by Nato could have major repercussions for the global economy. In the worse-case scenario, the world could be thrown into recession, stock markets left decimated and bond markets caught in the crossfire. Itís a Black Swan event that the global economy can do without.
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 managersí 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.
After stellar expansion last year, annual world trade growth is slowing and the backdrop of tighter monetary policy looming in the US is not helping. Rising inflation risks are adding pressure on central banks to push for tighter monetary policy after years of ultra-low interest rates.
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 Unionís 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.
US troops deployed to eastern Europe to support Nato amid Ukraine-Russia crisis
Central banks are unlikely to stand idly by if inflation takes off in a bigger way. Headline inflation rates are already feeling the heat from the near tripling of global natural gas prices over the past 18 months.
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.
A domestic gas hob pictured in the UK on September 21, 2021. Reduced supplies of natural gas from Russia would deepen the current global energy crisis, affecting households across Europe. Photo: Bloomberg
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.
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. Itís time to give peace a chance.
David Brown is the chief executive of New View Economics. Over a career spanning four decades in London, David held roles as chief economist in a number of international investment banks.
Russian invasion of Ukraine could send the battered global economy into recession | South China Morning Post (scmp.com)
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