Is the War in Ukraine just Part of an Economic Polycrisis?
The ongoing conflict between Russia and Ukraine is having far-reaching consequences for global food and energy security. While the crisis has resulted in sanctions on Russia and discussions about alternative energy sources in Europe, the impact on the world’s economy, commodity markets, and global supply chains is raising concerns.
Is the worst yet to come?
The fear of stagflation is looming as it recalls memories of the economic slump of the early 1970s when crude oil surged past $100 a barrel. As markets reacted to the situation, unemployment rose, while loose monetary policy pushed the core consumer price index up to a high of 13.5% in 1980 in the US. This caused a decline in GDP of 4.7% in the United States, 2.5% in Europe, and 7% in Japan.
Some economists argue that oil price rises are speeding up the transition from fossil fuels to clean energy options, but they also encourage more investment in fossil fuel extraction.
However, are fluctuating oil prices and the war in Ukraine actually just two parts of a “Polycrisis”?
Prof. Nouriel Roubini of New York University thinks so. In a recent interview with industry analysts at the McKinsey consultancy the renowned economist outlined how the Russia/Ukraine war is driving up prices for raw materials – boosting the chances of stagflation. However, his recent study points out a number of crisis which together are dragging on the global economy. Warning that, “an economic dilemma is making a financial crash inevitable.”
These crisis include:
1. Supply chain crisis. Blocked ports and deglobalization.
2. Debt crisis. An historic build-up of debt over the last 40 years - the amount of private debt and public debt as a share of global GDP in the 1970s was less than 100%. By 1999 it was 200%. Last year it was 350% of GDP and in advanced economies it was 420% of GDP and rising.
3. Climate change. The economic cost of severe weather and changing climate patterns.
4. Energy crisis. Countries switching off fossil fuel supplies while not building enough renewable energy sources. This causes pressure on energy costs.
5. Demographics. An aging population that cannot be supported by a falling birth rate.
6. US/China relations. Trade wars and superpower competitions are never good for the global economy.
7. Artificial Intelligence. How will economies cope when AI replaces millions of blue-collar jobs with robots and self-driving vehicles, at the same time as ChatGPT replaces millions of white-collar jobs?
8. Governmental monetary policy. Loosely pumping out money which fuels inflation.
9. Immigration crisis. The limiting of South to North migration that could slowdown wage inflation.
Roubini also believes that a less progressive trend is hurting the global economy.
“Geopolitics is becoming something that’s going to lead to deglobalization, protectionism, economic trade and financial sanction, balkanization of global supply chains, and fragmentation of the global economy,” explains Roubini. “Geopolitics now is leading to people talking about the need for secure trade and fair trade rather than free trade, to the need for reshoring manufacturing rather than offshoring manufacturing, or friend-shoring manufacturing rather than offshoring.”
Often known as ‘Dr Doom’ for his pessimistic predictions (what he calls realistic), Roubini is listened to carefully as an experienced economist. However, he rose to fame due to his successful foreseeing of the US mortgage collapse and global financial crisis of 2008.
Unfortunately, his gloomy outlook for current economic times continues today.
“I see stagflation coming up in advanced economies,” he says. “Inflation grows in part because there were bad policies, excessively loose monetary, fiscal, and credit easing during COVID. But in part because there were these negative supply shocks, like the impact of COVID on production of goods, services, supply of labor, and supply chains, the Russian invasion of Ukraine, the zero-COVID policy of China. And that combination of loose fiscal, monetary, and credit policy and negative supply shock that reduced growth and increased inflation is stagflationary.”
Investors are already recalibrating their portfolios for an expected period of high inflation and weaker growth. Washington would like OPEC+ to pump more oil to help reduce prices, but the producers' alliance and its allies led by Russia are still unwilling to move away from output cuts they instated in 2020 to boost prices after the coronavirus pandemic caused an unprecedented fall in global demand.
Worries will not be limited to fuel supplies alone, and it is feared that if the conflict in Ukraine prolongs, it will bleed the global economy white. It has already triggered a huge price surge in global commodity markets on fears of supply crunches.
Both Russia and Ukraine are major sources of raw materials for many industries that cannot be moved to alternative sources.
Oxford Economics forecasts a dark future for the global economy if the fighting in Ukraine lasts well into 2023, with the impact on Russian GDP being severe as it may contract by 3.1% in 2022, and the Eurozone GDP growth will slow to 2.2%.
The ongoing conflict between Russia and Ukraine has far-reaching consequences for the global economy, energy, and supply chains. The world's heavy reliance on energy resources and the impact on raw material markets has raised concerns about the potential for stagflation.
The world is now more connected than ever, and while Ukraine is burning, everyone is feeling the heat.
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