Long war may undercut global economy, analysts warn

Global economy recession risk spikes as Ukraine war drags into third year

James Okafor | GlobalBeat

A protracted war in Ukraine threatens to shave 1 percentage point off global growth in 2025 and push world inflation back above 5%, analysts warned on Tuesday.

Oxford Economics told clients the baseline forecast already assumes the conflict continues into 2024, but an extension through 2026 would raise energy prices by 20%.

Russia produces 11% of global oil and 17% of traded gas. Ukraine exports 10% of world wheat, the UN Comtrade database showed.

“Russia produces 11% of global oil and 17% of traded gas. Ukraine exports 10% of world wheat, the UN Comtrade database showed.”

Oxford senior economist Neil Shearing wrote that a three-year war pushes Brent crude to an average $105 per barrel in 2025, up from a projected $86. European natural gas would stay around €55 per megawatt hour, double pre-war levels.

The Institute of International Finance (IIF) issued a parallel note saying the euro area would slide into recession if gas prices spike above €80 again. “Manufacturing has no buffers left,” IIF deputy chief economist Elina Ribakova told reporters on a conference call.

Global GDP expanded 3.2% in 2023 and the IMF projected 3.0% for 2024. Oxford’s updated scenario knocks that down to 2.0% for 2025 and lifts consumer-price inflation to 5.3% from a prior 3.8%.

Food prices would rise 12% under the same model, driven by higher fertilizer and transport costs. The UN Food and Agriculture Organisation confirmed its vegetable-oil index has already climbed 14% since January.

Central banks would face a dilemma, Shearing wrote. Either tolerate higher inflation or tighten policy and risk outright contraction. The U.S. Federal Reserve held rates at 5.25-5.50% last month and signalled one cut this year, futures pricing showed on Tuesday.

Developing economies face the sharpest shock. Oxford estimates that for every $10 increase in Brent, current-account balances worsen by 0.3% of GDP in Turkey, 0.4% in South Africa and 0.5% in Thailand.

The African Development Bank said 29 of 54 African countries import more than one-third of their wheat from Russia or Ukraine. Kenya’s Treasury told reporters last week that import bills have risen $400 million since February 2022.

Bond spreads have already widened. JP Morgan’s EMBI Global index showed average yields 6.7 percentage points above U.S. Treasuries, up from 5.9 points at the start of April. “Markets price a non-zero chance of supply disruption lasting into late 2025,” the bank’s fixed-income team wrote.

Europe’s heavy industry is sounding alarms. Germany’s chemicals trade group VCI said gas accounted for 44% of the sector’s energy mix in 2023, twice the share of 1990. BASF announced it would permanently cut output at Ludwigshafen if gas exceeds €60 for two straight quarters.

The European Commission proposed on Monday to extend until 2025 emergency rules that require member states to reduce gas demand by 15% between November and March. EU energy commissioner Kadri Simson said storage sites are 64% full, close to the seasonal norm.

China, the top importer of crude and gas, would see a 0.5-percentage-point drag on growth, Oxford said. Customs data released on Tuesday showed the country paid 19% more for energy imports in January-March than a year earlier, even though volumes dipped 1%.

The People’s Bank of China signalled it is prepared to inject liquidity, keeping the seven-day repo rate below 2%. Analysts at ANZ warned that any fiscal stimulus would add to debt stock that already tops 280% of GDP.

Conflicts beyond Ukraine compound risk. The Red Sea shipping crisis has forced rerouting around Africa, adding 12 days to Asia-Europe voyages. Drewry’s world container index rose 40% since December, freight data showed.

Shipping giant Maersk told investors it expects Red Sea disruptions to last “at least through summer.” Oil traders said a similar rerouting of Russian cargoes via the Cape of Good Hope could add 600,000 barrels a day to effective demand by lengthening hauls.

Financial stability monitors said a prolonged war raises bank losses. ECB supervision chief Andrea Enria told lawmakers that euro-area lenders hold €135 billion of Russian assets, largely through subsidiaries. “A freeze exceeding 24 months would force writedowns,” he said.

Credit-rating firms are already reacting. S&P lowered its outlook on Hungary to negative last month citing “energy insecurity.” Moody’s placed Bulgaria on review, citing gas-grid vulnerabilities. Both countries rely on Russia for 60% or more of supply.

The U.S. maintains 90 million barrels in the Strategic Petroleum Reserve after last year’s drawdown. Energy Secretary Jennifer Granholm ruled out further sales in 2025, congressional testimony showed.

Analysts warned that Western sanctions, if tightened, could remove another 2 million barrels of Russian oil from the market. The EU ban on seaborne imports and the G7 price cap currently allow flow at around 8.5 million barrels daily, tanker-tracking data indicated.

Oxford Economics said the only scenario that cushions shock is accelerated renewable deployment, adding 0.3 percentage points to global investment in 2025. Yet supply-chain bottlenecks for solar panels and critical minerals leave limited room for quick gains.

Background

Russia’s full-scale invasion began on 24 February 2022, prompting the most severe package of sanctions ever imposed on a major economy. Western nations froze roughly $300 billion of Russian central-bank assets and curbed exports of chips, software and oil-service gear.

Energy sanctions took effect in stages. The European Union halted 90% of Russian oil imports by December 2022 and imposed a $60-per-barrel price cap on cargoes using Western insurance. Moscow rerouted supply to China, India and Turkey at discounts averaging $20 per barrel, finance-ministry figures showed.

Ukraine’s export capacity collapsed when Russia blockaded Black Sea ports. A UN-brokered grain corridor reopened in August 2022 but operated intermittently. Kyiv has since shipped 43 million tonnes of farm products through alternative Danube and over-land routes, agriculture ministry data showed.

What’s Next

The European Commission will review gas storage targets on 15 May and may raise the mandatory fill level to 90% by October. The U.S. House of Representatives plans a vote next month on legislation to impose secondary sanctions on banks that facilitate Russian energy sales above the price cap.

Western policymakers now debate transferring frozen Russian assets to Ukraine, a move Moscow vowed to counter through legal and economic retaliation. Investors expect market volatility to persist as long as diplomatic efforts remain stalled.

Any surprise cease-fire could unwind the inflationary tail risk, but central banks say they cannot base policy on that hope. Instead, they watch grain and energy futures for signals that the global economy is about to absorb another supply shock.