What We're Reading:

Western companies leave Russia—taking Russian jobs with them. More and more Russians are losing their jobs due to Western sanctions on Russia, and some are having to painfully rethink their future. With some sanctions' effects yet to be felt, the number of unemployed could grow. (DW)

Xi Jinping attacks ‘doubters’ as he doubles down on China’s zero-Covid policy. Xi Jinping has confirmed there is no intention to turn away from China’s zero-Covid commitment, in a major speech to the country’s senior officials that also warned against any criticism or doubting of the policy. (The Guardian)

Ukraine war: How Germany is getting rid of Russian oil. The pipeline that carries Russian oil to Germany is called Friendship, or Druzhba in Russian. But Vladimir Putin's attack on Ukraine has destroyed any lingering feelings of affection. (BBC)

Japanese premier warns of Ukraine-style invasion by ‘autocratic powers.’ Boris Johnson and Japanese prime minister Fumio Kishida have warned that the invasion of Ukraine could be replicated in east Asia if democratic powers do not stand up to autocratic ones. (The Guardian)

It’s not just Russia—China’s also contributing to higher inflation worldwide, report says. Russia is guilty of creating a food security crisis and higher energy prices through its war with Ukraine, but China has—under the radar—also taken actions in three areas that are exacerbating inflation worldwide, said the Peterson Institute for International Economics. (CNBC)

UK Conservatives lose London strongholds in blow to Boris Johnson. Britain's governing Conservatives suffered losses in their few London strongholds in local elections, according to results announced Friday that will pile more pressure on Prime Minister Boris Johnson amid ethics scandals and a worsening economic picture. (AP)

UN chief: Russia’s invasion is ‘limitless in its potential for global harm.’ UN Secretary-General António Guterres on Thursday doubled down on calls for an end to Russia’s unprovoked invasion of Ukraine, calling it "senseless in its scope, ruthless in its dimensions and limitless in its potential for global harm." (Axios)

Quantitative easing, meet quantitative tightening. During the pandemic, the Federal Reserve has tried to support the economy through “quantitative easing”—essentially a way the central bank injects more cash into the financial system. Wednesday, it tapped the brakes and announced something akin to an about-face: quantitative tightening. (NPR)

Supply side in focus as mounting snarls weigh on world economy. In the usually routine world of global logistics, the shipping system underpins globalization: Production on one side of the planet, and consumption on the other. (HSN)

What Europe's ban of Russian oil could mean for energy markets—and your gas prices. It’s going to get even more volatile in energy markets—and hence for gasoline prices. Crude prices jumped on Wednesday after the European Union proposed a ban on oil imports from Russia as part of a new round of sanctions targeting the country after its invasion of Ukraine. (NPR)

Moskva sinking: US gave intelligence that helped Ukraine sink Russian cruiser. The U.S. provided intelligence that helped Ukraine sink the Moskva, Russia's flagship Black Sea missile cruiser, several U.S. media report. Unnamed officials said Ukraine had asked the U.S. about a ship sailing to the south of Odesa. (BBC)

Russians steal vast amounts of Ukrainian grain and equipment, threatening this year's harvest. Russian forces are stealing farm equipment and thousands of tons of grain from Ukrainian farmers in areas they have occupied, as well as targeting food storage sites with artillery, multiple sources have told CNN. (CNN)

India finds Russian oil an irresistible deal, no matter the diplomatic pressure. A parade of emissaries has urged a harder line on Russia. But India’s political neutrality over the war in Ukraine has expanded into economic opportunism. (NYT)

Australia election: Interest rates rise for first time in decade. Australia's central bank has raised the nation's interest rates for the first time in more than a decade. The rise will put extra strain on household budgets as Australia prepares for an election that is heavily focused on the rising cost of living. (BBC)

The war in Ukraine has been raging on for roughly 10 weeks now with no sign of a solution anytime soon. Tensions between Russia and Western countries also have heightened as the conflict escalates, and fears are starting to swirl around the possibility of a new cold war.

“The Cold War is back,” JPMorgan Chase CEO Jamie Dimon told Bloomberg TV. “The allies have to coalesce and not just for military purposes but for global, economic, strategic investment purposes so that we’ve got a safe world. If we don’t do that, Ukraine, you could see that all around the world. You could see forms of chaos.”

Dimon told the news outlet that the chance of a lengthy conflict between Russia and Ukraine is possibly the biggest threat to the global economy, saying it would “completely rattle global energy markets, wheat markets, commodity markets.”

Russia has threatened the use of nuclear weapons since the start of the war, but many leaders are growing concerned that the threat could become reality as the war continues. A nuclear standoff between Russia and Western nations could push the already stressed global economy toward its breaking point.

“Even if Putin is persuaded to end this war by casting a small land grab in eastern Ukraine as a historic victory for Russia, there can be no return to the relative stability that existed before February 24,” reads a Foreign Affairs article. “The new Cold War will be open ended: Russia will remain indefinitely saddled with allied sanctions and will have few trade ties with Europe that might encourage restraint. A humiliated Putin is likely to test NATO’s resolve.”

May 9 could be a high point of Russia’s attack on Ukraine, according to several news outlets, as it marks the commemoration of the USSR’s victory over Nazi Germany in 1945. “The most likely scenario, according to sources in Brussels and Washington, is that the war will drag on and that Russia will keep up an escalation that increasingly includes the threat of using its nuclear arsenal,” reads an article from EL PAÍS.

So far, Western leaders have not raised nuclear alerts in hopes to avoid ramping up the possibility of entering a new cold war era. But as the conflict in Ukraine intensifies, the global response could become unpredictable. “U.S. and European leaders believe that they can prevent the conflict from spiraling out of control,” reads the Foreign Affairs article. “… but the longer the war continues, the harder it will be for each side to keep the fighting from escalating into a broader conflict.”

More than two months after Russia’s invasion of Ukraine on February 24, prospects for a rapid resolution of the war seem increasingly unlikely. As sanctions against Russia continue to pile up, a return to the pre-war situation seems illusory, even in the event of an early end to the conflict.

Coface has revised upward its estimate of the cost to the world economy to approximately one percentage point in 2022. However, the consequences of the conflict will be felt mainly from the second half of the year onward and will further materialize in 2023 and beyond.

Political risk, which had increased significantly at the global level with the pandemic, is exacerbated by soaring food and energy prices.

No region will be truly spared from the economic fallout of this war; and after the successive shocks of the 2020s, our perception remains the same: The world has shifted, and nothing will ever be the same.

Europe in Turmoil

Russia and Ukraine’s significant roles in the production of many commodities, coupled with fears of supply disruptions, have led to a surge in prices, resulting in a decline in household disposable income and therefore in consumption. Volatility and uncertainty also will weigh heavily on businesses’ investment decisions, as their financial situation is likely to deteriorate significantly as production costs either remain high or continue to rise.

In addition to the economies of Central and Eastern Europe, which have important economic ties with Russia, the countries of Western Europe are the most exposed because of their heavy dependence on Russian fossil fuels. Germany and Italy, whose economies are the most dependent on Russian gas, are likely to be strongly impacted (a negative impact of 1.6 pp on GDP growth). The impact will likely be weaker but still significant in the rest of Europe.

Inflationary Effects Push the Fed to Act Sooner Than Expected

Across the Atlantic, the impact on growth is set to be more modest due to limited trade with and financial exposure to Russia and Ukraine. Nevertheless, in the United States, the overall inflation rate has reached its highest level in 41 years, driven by food and energy prices. Excluding these items, monthly price growth has moderated, but remains well above the U.S. Federal Reserve’s 2% target, prompting the Fed to act sooner than expected.

After a first Fed funds rate hike in March, most members of the Monetary Policy Committee have expressed support for a "neutral" rate by the end of 2022, estimated to be between 2 and 3%. This would be one of the most aggressive tightening cycles since the 1990s, and would help moderate U.S. growth, hence our downward revision of the U.S. GDP growth forecast for 2022 to 2.7%.

No Region Will Be Spared from Imported Inflation and Supply Chain Disruptions

Africa, where an overall net negative effect of 0.5 percentage points is estimated, is a perfect example of how the current situation is affecting emerging economies, with the intensification of inflationary pressures, and the beginning of the Fed's policy tightening, with its effect on capital flows.

Asia also will not be spared from the consequences of the war, in addition to the slowdown in China linked to the Omicron variant. A prolonged conflict in Europe or a new escalation will have an estimated net negative impact of 0.5 points on GDP growth in 2022.

Latin America is another region vulnerable to Fed policy tightening, but should benefit from rising commodity prices. The net effect of the war in the region—which we estimate at -0.1 percentage point—is still uncertain and may not be fully felt in the near future.

Inflation is waging a war on economies around the world, but Europe may be facing some of the worst price increases. Much of the inflation Europe is seeing now stems directly from the war in Ukraine and its effect on energy prices.

“Inflation in Europe is very high at the moment,” European Central Bank (ECB) President Christine Lagarde said during CBS’s Face the Nation. “50% of that is related to energy prices. Pre-Ukraine war, it was already climbing, but the Ukraine war has dramatically increased those prices.”

Since much of inflation in Europe is caused by the war, which is out of the ECB’s control, traditional inflation-taming tools that other central banks are using may not work as well. “We have to use the tools and the sequence, which is appropriate depending on the sources of inflation. If I raise interest rates today, it is not going to bring the price of energy down,” Lagarde said.

Instead, Lagarde said the ECB plans to interrupt asset purchasing by the third quarter, possibly followed by interest rate hikes. This compares with the U.S. Federal Reserve, which has already hiked interest rates twice.

Inflation in 19 countries that use the euro hit a record level for the sixth month in a row, reaching 7.5%, according to the Associated Press. For the first time in more than a decade, inflation growth in Europe is expected to surpass that of the U.S., according to Bloomberg. European inflation is expected to sit at 3.02% over the next 10 years compared with 3.00% for the U.S., which would be the first time these rates flipped since the global financial crisis in 2009.

“It all makes for an uncomfortable situation for the European Central Bank, which has to balance the need to curb inflation with threats to economic growth. More economists are talking about a possible recession as the region grapples with a ban on Russian oil and the possibility of energy rationing,” reads a Bloomberg article.

 

Week in Review Editorial Team:

Diana Mota, Editor in Chief

Annacaroline Caruso, Editorial Associate