The longer the conflict in Ukraine lasts, the more dire will be the global consequences – economic, geopolitical and societal. Inflation is soaring and set to persist. Russia’s war is provoking a major global food crisis that is impacting disproportionately hard the world’s poorest. Lockdowns in China are creating further inflationary pressures with widespread fallout. The latest IPCC report tells us time is running out – carbon capture technology much rise to the challenge. ESGs are falling out of favour. The negative impact of the pandemic persists in the guise of Long Covid.
- Russia and Ukraine combined account for only 3.5% of global GDP, but their war is exercising a negative multiplier effect on the world economy. The conflict has magnified everything that was a worry before Russia’s aggression (notably supply chain disruptions, inflation, financial and recessionary risks). If the war and the uncertainty it provokes do not worsen (a big if – see below), global GDP will be 1.3 percentage points lower than expected (according to the WB). But growth prospects will get worse. Europe is already in stagflation (i.e.: no growth, high inflation).
- As Putin is intent on waging a conflict with the western world and ending Ukrainian statehood, the war will most likely endure and escalate. At the very least, Russia covets not just the Donbas, but all south-east Ukraine, thus blocking the country’s access to the sea. The war is not going well for Russia, but for a variety of reasons and because Putin cannot settle for an ‘inglorious’ peace, a war of attrition is in his interest. As such, it could last for months if not years. While this period persists, a sword of Damocles hangs over the world economy and Western societies. Russia is much weaker – economically and militarily – than it was two months ago but this is no reason for complacency, rather a cause for concern.
- Inflation is the war’s most apparent and damaging global economic consequence. It is now soaring and becoming ‘persistent’ – fuelled by supply shocks and the subsequent ‘explosion’ in commodity prices (energy, food, and others like metals), but equally demand-driven(particularly in the US). Year-on-year inflation rates currently stand at 7.5% in the EU, 8.5% in the US and at double digit rates in many emerging markets. In the rich world, the pressure to index salaries and pensions is rising, which creates a conundrum for central bankers. (1) No indexation will erode employee purchasing power, triggering social discontent, and leading to a recession; while (2) indexation will create a dangerous wage – price spiral forcing central bankers to hike rates more than expected, eventually quelling inflation but at the same time creating a painful recession.
- Russia’s aggression is stoking a major global food crisis which hurts disproportionately the poorest nations and the poorest people. The conflict is constraining production and supplies in the Black Sea breadbasket region (which accounts for about a quarter of all grain trades) and wreaking havoc on food and fertilizer supply chains. As a result, world food prices just surged at their fastest pace ever (at the end of March, 34% up Y-o-Y and 12.6% M-o-M). Food price inflation will last for as long as the war lasts. A UN agency estimates that the global gap between supply and demand for food and feed provoked by the war could raise world food prices by a further 8 to 22%. This risks creating social and political turmoil, large pockets of instability and multiple second-round consequences (like massive uncontrolled migration).
- Fears of a lost decade in the least developed countries and emerging markets are being re-ignited. The combination of (1) the impending rise in interest rates, (2) energy and food price inflation, and (3) geopolitical turmoil spells at best trouble, if not disaster, for many of them. Among the greatest concerns are: (1) An increasing risk of hunger and possibly famine in the 50 or so countries that depend on Russia and Ukraine for at least 30% of their wheat imports. (2) More than half the world’s 70-ish low-income countries facing an acute risk of debt distress. (3) The strength of the $ and capital outflows increasing default risk for EM dollar-denominated corporate and sovereign debt (which is now at an all-time high). Irrespective of potential default, this will constrain growth and create strong headwinds for development.
- As China accounts for about 12% of global trade, its lockdown (fragmented so far, but affecting some major cities), will impact global supply chains around the world. These consequences are non-linear, with small causes producing huge effects. Thus, industry experts expect the resulting backlog (everywhere) and its fallout to last until the end of 2022, raising the cost of global merchandise trade. Yet another inflationary supply shock and a call to shorten supply chains.
- The “Tragedy of the commons” – According to the latest IPCC report (whose conclusions only the die-hard conspiracists can disagree with), we’ve only got three years to get our act together. Limiting global warming to 1.5C means global emissions must peak within three years (But in 2021 they rose by 6% compared to 2019 and will rise again this year). This will require a 43% cut in global emissions by 2030. Such an ambitious target can only be achieved by removing carbon as well as cutting emissions. Biological means like reforestation and soil preservation are indispensable but not enough – carbon capture technology will have to come to the rescue. A massive wave of innovation and investment needs to follow, if we are to mitigate the risk of a destructive 3.2C rise by the end of this century.
- The acronym ESG and the conceptual framework it provides seem to be falling out of favour. Many insiders and observers are now accusing the financial industry and ‘big’ business of engaging in mis-selling, greenwashing, and peddling “disingenuous” promises in the name of ESG. Some even predict the advent of a “cancel ESG” era. The acronym may be abandoned or unbundled, but the underlying reason for its existence in the first place will persist and strengthen. Increasingly, boards and directors are being asked to emphasize and focus on: (1) climate change, (2) biodiversity, (3) executive pay and (4) human rights.
- Long Covid has been called “the pandemic after the pandemic”. Although hard to define (brain fog, fatigue and shortness of breath are the most common symptoms) it appears to be widespread and serious enough to have an effect on the labour force and as a result the economy. A recent UK study affirms that almost 3% of the entire British population (1.7m people) self-reported long-Covid symptoms, with a total of 1.1m unable to undertake normal daily activities. If so, long Covid could amount to a major global public health crisis.
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