War in Ukraine and the Global Economy

The most recent OECD Economic Outlook report (June 2022) leads off with a discussion of how Russia’s attack on Ukraine is affecting the global economy. The first chapter begins like this (references to tables omitted):

The war in Ukraine has generated a major humanitarian crisis affecting millions of people. The associated economic shocks, and their impact on global commodity, trade and financial markets, will also have a material impact on economic outcomes and livelihoods. Prior to the outbreak of the war the outlook appeared broadly favourable over 2022-23, with growth and inflation returning to normality as the COVID-19 pandemic and supply-side constraints waned. The invasion of Ukraine, along with shutdowns in major cities and ports in China due to the zero-COVID policy, has generated a new set of adverse shocks. Global GDP growth is now projected to slow sharply this year to 3%, around 1½ percentage points weaker than projected in the December 2021 OECD Economic Outlook, and to remain at a similar subdued pace in 2023. In part, this reflects deep downturns in Russia and Ukraine, but growth is set to be considerably weaker than expected in most economies, especially in Europe, where an embargo on oil and coal imports from Russia is incorporated in the projections for 2023. Commodity prices have risen substantially, reflecting the importance of supply from Russia and Ukraine in many markets, adding to inflationary pressures and hitting real incomes and spending, particularly for the most vulnerable households. In many emerging-market economies the risks of food shortages are high given the reliance on agricultural exports from Russia and Ukraine. Supply-side pressures have also intensified as a result of the conflict, as well as the shutdowns in China. Consumer price inflation is projected to remain elevated, averaging around 5½ per cent in the major advanced economies in 2022, and 8½ per cent in the OECD as a whole, before receding in 2023 as supply-chain and commodity price pressures wane and the impact of tighter monetary conditions begins to be felt. Core inflation, though slowing, is nonetheless projected to remain at or above medium-term objectives in many major economies at the end of 2023.

The uncertainty around this outlook is high, and there are a number of prominent risks. The effects of the war in Ukraine may be even greater than assumed, for example because of an abrupt Europe-wide interruption of flows of gas from Russia, further increases in commodity prices, or stronger disruptions to global supply chains. Inflationary pressures could also prove stronger than expected, with risks that higher inflation expectations move away from central bank objectives and become reflected in faster wage growth amidst tight labour markets. Sharp increases in policy interest rates could also slow growth by more than projected. Financial markets have so far adjusted smoothly to tighter global financial conditions, but there are significant potential vulnerabilities from high debt levels and elevated asset prices.

While the report discusses a number of issues, two immediate concerns are commodity prices and refugees.

The major influence of Russia and Ukraine on the global economy is via their role as important suppliers in a number of commodity markets. Together they account for about 30% of global exports of wheat, 15% for corn, 20% for mineral fertilisers and natural gas, and 11% for oil. In addition, global supply chains are dependent on Russian and Ukrainian exports of metals (see below) and inert gases. The prices of many of these commodities increased sharply after the onset of the war, even in the immediate absence of any significant disruption to production or export volumes (Figure 1.1). … A particular concern is that a cessation of wheat exports from Russia and Ukraine could result in serious food shortages in many developing economies. There would be an acute risk not only of economic crises in some countries but also humanitarian disasters, with a sharp increase in poverty and hunger. The food supply shock could be compounded by fertiliser shortages and price rises, with Russia and Belarus major suppliers in many countries, putting agricultural output next year and perhaps beyond under stress.

On the magnitude of the refugees from Ukraine:

The war in Ukraine has generated a historic outflow of people fleeing the conflict, unseen in Europe since World War II. The Syrian conflict raged for two years before the number of refugees abroad reached three million in 2015-16, whilst this number was reached in less than 3 weeks for the war in Ukraine. By May 18, according to data from the UNHCR, more than 6.2 million people had fled Ukraine and an additional estimated 8 million were internally displaced. About 5.3 million Ukrainian refugees have reached the European Union. Close to 3.4 million Ukrainians crossed into Poland, almost 930 000 into Romania, 615 000 into Hungary and 427 000 into the Slovak Republic.

Over the medium-term, expect other consequences to arise: for example, from detaching European energy markets from Russian suppliers, from other shifts in global supply chains, and from costs of and reactions to international financial sanctions.