How War in Ukraine Threatens the World’s Economic Recovery
The pandemic has left the global economy with two key points of vulnerability — high inflation and volatile financial markets. Aftershocks from the invasion could easily worsen both.
There’s a threat to growth too. Households spending an ever-larger chunk of their incomes on fuel and heating will have less cash for other goods and services. Plunging markets would add another drag, hitting wealth and confidence, and making it harder for firms to tap funds for investment.
For central bankers, the twin challenge — of managing prices and keeping their economies growing — will get even harder. The Federal Reserve and European Central Bank have been gearing up to tighten monetary policy. The Russia crisis may force a rethink.
Bloomberg Economics has captured some of those effects in three scenarios that examine how the war could impact growth, inflation and monetary policy.
- A swift end to fighting prevents a further upward spiral in commodity markets, keeping U.S. and European economic recoveries just about on track.
- A prolonged conflict, tougher Western response and disruptions to Russia's oil and gas exports would deliver a bigger energy shock and a major blow to global markets. That would likely take ECB rate hikes off the table this year, while Fed tightening would slow down.
- A worst-case outcome would see Europe’s gas supply cut off, triggering a recession, while the U.S. would see significantly tighter financial conditions, a bigger hit to growth, and a markedly more dovish Fed.
You can read more about the detailed scenarios here.
Source: Bloomberg, https://www.bloomberg.com