Money Matters

War and the world economy

By News Desk.
Mon, 02, 23

A little over a year ago, at the end of January 2022, an analysis article on the RTÉ website examining what the possible implications of a Russian invasion of Ukraine might be for the global economy.

War and the world economy

A little over a year ago, at the end of January 2022, an analysis article on the RTÉ website examining what the possible implications of a Russian invasion of Ukraine might be for the global economy.

At the time, Russian rhetoric was building, as was its military presence on the borders of Ukraine.

But at that point, the consensus in the sphere of economics and business was that this was just sabre rattling and empty threats.

The feeling was that Vladimir Putin would never be so stupid as to risk the military, political, economic and social consequences that would follow a further unlawful incursion into a sovereign state.

How wrong we all were.

Just over three weeks later, his bloody invasion began.

What has followed, of course, has been a year of death, fear, torture and torment for the people of Ukraine.

The global economic fallout, while of course secondary to the direct impact on the lives of the Ukrainian people, has been substantial.

Ukraine itself lost about a third of its GDP last year, according to preliminary economic data released by it last month, its sharpest economic decline in the more than three decades since it won independence from the Soviet Union.

Its export led economy understandably slumped 3 percent in value, as production ground to a halt and ports were targeted and blocked by Russian aggressors.

Along with fertiliser, Ukraine is a major producer of grain for the world.

While exports of the food source were interrupted for a period, sending global prices soaring and spreading fears of food shortages, the commodity still accounted for the bulk of Ukraine's exports last year.

Foreign aid flowing into the country has helped to offset some of the challenges.

Last month it was reported by Reuters that $31 billion had been received by Ukraine during last year in the form of grants and loans from abroad.

Nonetheless, the constant attacks on the country’s infrastructure mean the economy will struggle this year to repeat the rather remarkable economic performance of 2022.

A substation stands partially destroyed after the Ukrenergo power station was hit by a missile

GDP is predicted to contract further this year and the country is aiming to have a deficit of $38 billion, a budgetary hole which will be plugged with foreign aid.

But the economic ripples of the conflict have fanned out far and wide, well beyond the military frontlines of places such as Bakhmut and Vuhledar and Kherson.

At ground level, companies trading in Ukraine, including several well-known ones from Ireland, have had to adapt their operations.

Agri-services group, Origin Enterprises, which operates in Ukraine for example, has said that its activity levels have significantly reduced there, as planted areas of the country contract.

CRH, one of the leading cement producers in Ukraine, also reported reduced levels of activity there when it issued a trading update in November.

Any yet, despite all the tumult, the world economy is ticking along quite defiantly.

At a more global level, not every corporation has taken to the ethical moral high ground quite as firmly.

The Moral Ratings Agency claims that of the top 122 global companies that were involved with Russia at the time of the invasion of Ukraine, just 17 have left completely - including Alphabet, Amazon, Apple, Meta, Exxon Mobil, Nissan, Tesco and others.

It says 59 are "stuck in the middle", with either some activity or an incomplete planned exit from the country, or both.

A further 46 are classed as "still in" Russia, many of which perhaps unsurprisingly have China somewhere in their name and/or their ownership structure.

It isn’t just the on the ground operations of businesses that have been touched by the war.

The massive disruption to energy markets has created untold difficulties for consumers and organisations right across the globe, but particularly here in Europe.

The weaponisation of gas supplies by Putin, leading to a gradual and eventually a complete shutdown of flows into Europe from Russia, precipitated an energy crisis across the continent.

The Nordstream pipelines from Russia into Europe were the centre of focus last year

By August of last year, EU gas prices had hit an unprecedented peak, up by 1000 percent compared to a record pandemic induced low in May 2020.

Oil, coal and other fuels produced by Russia were also not immune, as energy providers scrambled around for alternative sources of power.

Benchmark Brent crude hit its highest level since 2008 in March, tipping $139 a barrel.

The knock-on consequence of all this, as we are now too aware, has been a rising cost of living, as the influence of stratospheric energy costs became pervasive across almost all products and services.

According to a recent analysis published in Nature Energy, total direct and indirect energy costs for households have increased by at least 63 percent and possibly as much as 113 percent, contributing to an increase in global household expenditure of between 2.7 percent and 4.8 percent.

Here in the eurozone, that led to inflation peaking at 10.6 percent last October and in Ireland at 9.2 percent the same month.

Granted, not all this price stress can be attributed to the effects of the war.

Energy prices had already been climbing gradually, while coming out of the pandemic demand rebounded.

And in many places, including Ireland, there were plenty of pent-up savings sloshing around to fuel it.

Supply chains were also still tight because of Covid interruptions, meaning that demand could not always be met.

Nonetheless, Russia’s war has amplified massively an already difficult situation.

Central banks have reacted in the way they do, by raising interest rates, stifling borrowing and spending, and slowing or in some places reversing economic growth.

That cycle is not yet over, with more rate increases likely from the European Central Bank over the coming months.

Any yet, despite all the tumult, the world economy is ticking along quite defiantly.

Wholesale energy prices have eased considerably and are back below pre-war levels, with confidence growing that the crippling link of dependence on Russia has been severed successfully.

Inflation as a result, while still high, is also coming down steadily and is forecast by the IMF to reach 6.6. percent this year.

Talk and warnings of recession, or at least a prolonged contraction, is fading fast, with the IMF projecting that the global economy will grow by 2.9 percent in GDP terms in 2023.

Markets, which took a pummeling in late February and early March last year, and again in Summer and October, have largely recovered to where they were pre-invasion.

It is unclear what Putin is planning to do next, what his long-term strategic goals around Ukraine are or who his future economic allies in that effort will be.

It is clear though that sadly, this conflict has some way to run yet and could get worse before it ends.