WASHINGTON: The International Monetary Fund (IMF) has warned that entire global economy will feel the effects of slower growth and faster inflation triggered by Russia’s invasion of Ukraine.
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, neighbouring 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 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.
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.
