Ukraine conflict: impact on the world economy

 The FT has a long article on the economic impact of the war in Ukraine. The highlights (shown in italics):

• Impact on world economic growth: Before the war, global growth was expected to be in the region of 5 per cent in 2022, but Sheets (Citibank Chief Economist) reckons “if the [Ukrainian] tensions are prolonged or escalate further, the markdowns to this year’s growth outlook may need to be denominated in percentage points”.

• Impact on Europe: The organisation (OECD). simulated a 1.4 percentage point hit to Europe’s economy in 2022, based on the effects so far, but officials are worried this underestimates the true economic impact. .... The worst-case scenario modelled by economists and central banks is if Russian energy supplies to Europe are cut off. Jan Hatzius, chief economist of Goldman Sachs, estimates an EU ban on Russian energy imports would cause a 2.2 per cent hit to production and trigger a eurozone recession, defined as two consecutive quarters of economic contraction.

• Impact on the US: The US is, perhaps, the best placed which, perhaps, explains why the US is keen on propping up the government in Ukraine.  In contrast to Europe, the US economy is running too hot, with unemployment at 3.8 per cent in February almost back to the pre-pandemic rate of 3.5 per cent, and inflation at a multi-decade high last month, with consumer prices 7.9 per cent higher than a year earlier.

What about China and the emerging markets? China, as observers have noted, will be careful not to violate sanctions against Russia even while it provides moral support to Russia. Unless there is covert Chinese support to Russia that invites the wrath of the US, China should be well placed to withstand the present turbulence. The West has to be careful in imposing sanctions against China given that China is far more closely integrated with the global economy than Russia.  

As for emerging markets, a flight of funds is inevitable as interest rates in the US rise. But most emerging markets, including India, are well placed to deal with the pressure on their currencies, thanks to strong foreign exchange reserves. But emerging markets cannot escape the impact on growth as the global economy slows.