Jakarta, IO – The global economic recovery from the impact of the Covid-19 pandemic is facing a “stumbling block” as the Russia-Ukraine war, which started on February 24, continues to rage. The war has sparked soaring energy and food commodity prices and hindered economic recovery. Before the war, global crude prices had been on the rise, as the global economy began to rebound from the pandemic, pushing up demand. Russia’s invasion of Ukraine drove prices even higher with Brent crude zooming past US$105 per barrel on February 24, shortly after Russia attacked Ukraine, while WTI hit US$103 per barrel on March 1.
The same trend was also evident with the price of food commodities. FAO Food Price Index jumped from 135.6 in January to 159.7 in March. Even though crude price has currently fallen to US$80 per barrel and FAO Food Price Index at 135.7 as of November, the global economy in 2023 is still overshadowed by uncertainty, as there is no end in sight for the Ukraine war.
IMF in October projected the global economy to grow 3.2 percent in 2022, near the pre-pandemic level. However, as the war becomes protracted, the IMF estimated the global economy would only grow by 2.7 percent in 2023, a significant slowdown from this year. The grim growth outlook is compounded by a global inflation rate that is likely to remain high – at 6.5 percent – in 2023.
Waiting for the war to end
A major determinant that will influence the global economy in 2023 is escalation of geopolitical tensions, especially in Eastern Europe, with the protracted Ukraine war. Without efforts to end the war or reach a ceasefire, it will be difficult for the global economy to turn optimistic next year. The war has created a domino effect that reverberates worldwide.
First, it has triggered a spike in oil and natural gas prices, further driving up energy price inflation across the world. And as Russia and Ukraine are both major food exporters, the war has resulted in supply chain disruption, leading to surging global food prices. However, the global oil price has trended downward in recent months, as shown by West Texas Intermediate (WTI) which now stands at around US$80 per barrel, almost at the same level of Q3-2021 before the war. While this is definitely good news for the global economy, the risk of escalation of the war will continue to haunt the global economy next year.
With regard to global food prices, the FAO Food Price Index shows that global food crisis, which began in March 2022, has started to ease. The fear that the world is facing a threat of recession due to rising food prices has also begun to subside. However, the prices of food are closely linked to inflation. Thus, as long as inflation in many countries remains high, the global economy in 2023 will still be in uncharted territory.
Secondly, the problem becomes more complicated given that the response by central banks across the world has been to raise their benchmark interest rate, a move which subsequently inflicts pain on the real sector. The U.S. central bank (the Fed), for example, is battling 40-year high inflation by aggressively raising its base rate several times this year, to 75 basis points (bps) and again by 50 bps in December.
This sharp increase has forced central banks in other countries to immediately adjust their own rates to stem capital outflows which can adversely impact exchange rates, especially in developing countries. This has further fueled fear of a global recession in 2023.
This triple whammy of high energy prices, food price volatility and aggressive rate hikes by central banks across the world are the most urgent problems that need to be resolved in 2023. And all of these stem directly from the Ukraine war. Without trivializing other issues that also give rise to economic uncertainty, it can be argued that if the Russia-Ukraine war subsides, the “dark clouds” over the global economy in 2023 will also dissipate.