The Russia-Ukraine war has increased economic volatility as the US volatility index (VIX) and the economic policy uncertainty (EPU) index have seen a rise. But the rise is not as much as it was in March 2020 when the first wave of the COVID-19 pandemic hit the world.
According to a McKinsey report, the economic volatility is surprisingly low during the period of conflict. However, new potential risks to global economic growth have emerged as a direct consequence of the conflict.
The war’s effects on volatility in energy sources and prices can produce dramatic effects throughout the global economy. Geopolitical instability is also a limiter for businesses as it prevents them from taking risks and expansion. According to the McKinsey Global Survey of executive sentiment of March 2022, geopolitical risk displaced the pandemic and inflation as the biggest threat to global economic growth. Many economic experts have also shared their opinion on the future economic activity given the current market indicators.
Here are the potential risks to global economic growth.
1. Geopolitical instability
Over half of executives who participated in the survey saw geopolitical instability as the biggest potential risk to global economic development. Geopolitical unrest affects confidence of businesses to take risks and increases uncertainty.
2. Inflation
Rising inflation has impacted the cost of living, the cost of doing business, borrowing money, and every other facet of the economy. World Bank president, David Malpass has warned that the risk of inflation and low growth or "stagflation" is also higher.
Interest rates have gone up in most parts of the world to bring down the inflation and they are likely to be raised further, IMF’s Gita Gopinath said in a CNBC report.
However, India is better placed than many countries despite the risk of rising inflation and stagflation is also relatively low, as per Chief Economic Advisor of India V Anantha Nageswaran.
The World Bank has warned of a recession risk due to the ongoing Russia-Ukraine war. Less developed countries in Europe and East Asia facing a "major recession" are the most vulnerable. "The war in Ukraine, lockdowns in China, supply-chain disruptions, and the risk of stagflation are hammering growth. For many countries, recession will be hard to avoid," World Bank President David Malpass said in a BBC report.
Nobel laureate and Yale professor Robert Shiller had also talked about a good chance of recession happening in sometime in an interview with Bloomberg. JPMorgan Chase CEO Jamie Dimon and billionaire investors like Carl Icahn are also predicting a recession.
4. Volatile energy prices
Since the start of the Russia-Ukraine conflict, the crude oil prices were pushed to a record high. The geopolitical tensions increased instability in the Middle East and added to oil market nervousness. The surge in crude oil prices has caused a rise in food inflation. As per a BBC report, the World Bank has warned that soaring food and energy costs will threaten to throw livelihoods into a reverse spiral causing hardship for the most vulnerable people across the globe.
5. Supply chain disruption
The conflict in Ukraine has forced most organisations to create more resilient supply chains. The overreliance of Europe, on natural gas and crude oil from Russia, as well as dependence on both Russia and Ukraine for key agricultural commodities has emerged as a key vulnerability for the global economy.
As per a CBS news report, the disruption in grain shipments from Russia and Ukraine, that provide nearly one-third of the world's wheat supply, has caused the food prices in Africa and Asia to skyrocket. The international aid groups have warned that hundreds of thousands of people could starve this summer as a result.
6. Rising interest rates
To combat inflation, central banks around the globe are hiking interest rates. This affects borrowers and businesses in different ways as the rates on financial products like loans and mortgages change. India witnessed a steep surge in both retail and wholesale inflation, causing the central bank to hike repo rates by another 50 basis points to 4.90 percent and two more hikes of 35 bps and 25bps are expected in the next two monetary policies.
Meanwhile, Jamie Dimon, CEO of JP Morgan Chase, has warned about an economic hurricane on the horizon as fallout from Russia's war in Ukraine and the effects of surging inflation. He has warned that the US Federal Reserve will tip the economy into recession in a bid to control spending and inflation.
7. Labour shortages
The current global labour shortage is impacting healthcare, transport, hospitality, social assistance, and foodservice industries. While COVID-19 triggered the trend, geopolitical tensions have added to the problem.
8. Increased economic volatility
The war has increased economic volatility. The global coordination of sanctions has impacted businesses across sectors globally. Also, the fluctuating energy prices have increased volatility in the markets.
9. COVID-19 pandemic
COVID-19 continues to impact the global economy as the threat is still lingering especially in parts of Greater China. China is key supplier to many industries and disruption in supply due to lockdowns has pushed many sectors such as the tech sector to cut down production.
10. Domestic political conflict
Domestic political conflict continues to be on the list as social tensions in many countries are on the rise. Over 10 percent of the respondents in McKinsey’s survey mentioned it as a threat to economic development.
The past three years have witnessed several changes in trade policy of leading economies such as the US and EU. With continuous developments in geopolitical relations, business leaders are eyeing the rapid changes in policies as a threat to economic growth
(Edited by : Sudarsanan Mani)
First Published: Jun 7, 2022 1:47 PM IST
