Moody Rating Agency has said that Russia’s invasion of Ukraine has significantly altered the global economic backdrop through three main channels. First, the spike in commodities prices driven by existing and expected supply shortages is creating risks of damagingly high input costs and consumer inflation over an extended period. Second, financial and business disruption poses risks to the highly integrated global economy. Third, heightened security and geopolitical risks will exert economic costs and weigh on the economy by denting sentiment. We have lowered our baseline growth forecasts to capture these shifts in the global economic environment. It said “we are reducing our global economic growth projections and raising our inflation forecasts. We view the global expansion as dented, but not derailed. We now expect the G-20 economies to expand 3.6% collectively in 2022, compared with 4.3% growth envisioned in our February outlook. Growth will further slow to 3.0% in 2023. Russia
is the only G-20 economy that we forecast will contract this year. We forecast that its economy will shrink 7% this year and 3% in 2023, down from projected growth of 2.0% and 1.5%, respectively, before the invasion of Ukraine. Magnitude of growth effects will depend on the conflict’s duration and scope. While it is clear that the military conflict will hurt economic activity and exacerbate inflation, a wide range of outcomes is possible, depending on the crisis’ length and potential escalation, as well as policy responses and their effectiveness. In alternative downside scenarios, the global economy could tip into recession. In an alternative downside scenario to our baseline forecasts, in which oil and gas exports from Russia to Europe are cut, oil prices would surge and the global economy would be thrust into recession. Other downside scenarios with very negative consequences for the global economy include potential widening of the Russia-Ukraine military conflict to other countries”.
According to the Rating Agency “other risks could compound geopolitical threats to the economy. Developments that could dampen our global economic outlook include the potential for new COVID-19 waves, monetary policy missteps, and social risks associated with high inflation. Monetary policy tightening cycle to advance. Even before Russia invaded Ukraine, financial conditions were tightening in anticipation of the imminent reduction in monetary policy support. New supply shocks are only adding to inflation fears, raising pressure on central banks to tighten monetary policy more aggressively. We are lowering our global economic growth projections and raising our inflation forecasts. The economic backdrop has materially changed since the publication of our February Global Macro Outlook in the wake of Russia’s invasion of Ukraine. Although the share of both countries in the global economy is relatively limited, the military conflict and ensuing sanctions on Russia will have spillover effects to the rest of the world through three major channels: commodity and food price shocks at a time when inflation is already high and supply constraints remain a challenge globally; financial repercussions from the sanctions, suspension of business activity in those countries and financial market volatility; and additional security challenges in a scenario of an escalating or wider military conflict, or through cyberattacks. There is also considerable scope for the current situation to deteriorate. Adding to these risks is the fact that the global economy has not fully recovered from the COVID-19 shock and China is in the midst of new outbreaks in two large cities, countered by the renewal of strict lockdowns in Shanghai and Shenzhen.
“Before the eruption of the Russia-Ukraine conflict, we expected global growth to decelerate to the post-pandemic trend because of rising interest rates, waning fiscal support and the overall maturing of the business cycle across both advanced and emerging market countries. We are now revising downward our global growth projections and raising our inflation forecasts However, our baseline forecast sees the Russia-Ukraine shock denting, but not derailing, the global economic expansion, in part because we expect governments to use fiscal measures to soften the impact. We forecast that the G-20 economies collectively will expand 3.6% in 2022, 0.7 percentage point lower than the 4.3% growth we envisioned in our February outlook. The global economy will further slow to 3.0% in 2023, decelerating to long-term trend growth of 3.0%-3.5%. We expect the G-20 advanced economies to expand 3.2% in 2022 and the G-20 emerging market countries to grow 4.2% in 2022, down from our forecasts of 3.9% and 4.9%, respectively, before the invasion of Ukraine. We have accordingly slashed our 2022 growth forecasts for Russia by 9 percentage points. We now expect the economy to contract 7% this year and 3% in 2023.
“Russia’s invasion of Ukraine sent oil prices soaring, as Russia accounts for around 10% of global oil output. Demand for Russian oil has fallen, but finding suitable substitutes in short order is a challenge. Costs are also rising sharply for other commodities that Russia and Ukraine supply to the world, including other fossil fuels like gas and coal, industrial metals such as copper, nickel, palladium and gold, and agricultural commodities like grains, edible oil and animal feed. Prices of commodities that are essential for the production of high- tech equipment have also jumped. Higher prices for household necessities will chip into consumers’ finances, particularly on the lower end of the income distribution. The new negative energy price shock poses the risk of more pervasive inflation for longer and will also lead to higher interest rates, which will further weaken consumer spending and private investment. Supply disruptions from Russia and Ukraine of metals and other minerals throw a wrench in the supply chain recovery. High prices of consumer essentials such as food and energy will take a toll on sentiment. Altogether, these factors will further slow economic growth in the coming quarters.
Moreover, the rise in fuel and metals prices will continue to exacerbate supply-side cost pressures. Renewed production delays and freight issues will limit output capacity. On the demand side, some countries may turn to subsidies to alleviate the financial burden of higher prices, which will only serve to keep demand for commodities artificially high, thereby aggravating global price pressures. With this economic backdrop, regardless of the next steps in the conflict, monetary and financial conditions are set to tighten more aggressively than they would have otherwise. Soaring energy prices, shortages of key production inputs and suspended trade routes resulting from the Russia-Ukraine conflict could further snarl global supply chains just as they were beginning to bounce back from COVID-19 disruptions. Additionally, higher inflation, tighter financial conditions and high uncertainty will weigh on consumption and investment decisions, dragging on economic growth. Oil terms-of-trade shock and impact on inflation will vary across G-20 economies. Of the major global economies, Saudi Arabia and Canada, are surplus oil producers and therefore could reap better commodity terms-of-trade benefits from higher global oil prices. The US, the largest oil producer, will similarly benefit, with oil production expected to increase and exceed domestic consumption. In Latin America, Brazil and Mexico are also relatively insulated, with Brazil being a small net exporter of crude oil and Mexico, like the US, being self-sufficient. While Australia is a net importer of crude oil, it is a large exporter of coal and iron ore, both of which have also seen a steep rise in prices. The euro area, China, Indonesia Japan, Korea, South Africa, Turkey and India are also net crude oil importers to various degrees and therefore more exposed to the oil price shock.
