IA “FAKT” already wrote about 5 shocking forecasts that will determine the state of the world economy in the current year. The ongoing energy crisis, global food security, inflation and rising cost of living, long-term economic consequences of the war in Ukraine for the whole world are actively discussed in the information field. Let’s consider some of the macroeconomic trends covered by experts today.
Increasing energy dependence of Europe and Asia
The war disrupted the supply of energy carriers from Russia, which led to a sharp rise in oil and gas prices around the world. Some oil exporters, such as countries in the Middle East and Africa, may benefit from rising oil prices. It is impossible to overestimate the impact of this crisis on businesses, households and the economies of Europe and Asia.
Rising energy prices and disruptions in supply chains have a particularly strong impact on Europe, which is heavily dependent on energy imports from Russia. The economy of other major oil importers – Japan, India, and South Korea – is highly dependent on energy imports. Among the financial challenges provoked by the rise in oil prices, there may be an increase in the budget and trade deficit, a violation of the trade balance and economic stability as such (inflation, a fall in purchasing power, etc.).
It is obvious that the increase in prices for oil, gas and other energy resources leads to an increase in the costs of production and transportation of goods. High energy prices put pressure on businesses, which are forced to pass on part of the costs to consumers. This inevitably provokes a general increase in prices for goods and services.
Inflation and rising cost of living
The war disrupted global supply chains, leading to shortages and delays in various industries. The impact of this on production, trade and economic growth is obvious. The increase in prices for agricultural products – wheat, meat and milk – affects inflation. If farmers face rising prices for fertiliser, fuel or transport, they may raise the prices of their produce. This also affects the final prices for consumers.
The growing risk of famine and food shortages in countries dependent on imports from Ukraine
The war also disrupted food supply chains from Ukraine, which is a major exporter of grain and other agricultural products. This is especially felt in countries that are heavily dependent on the import of these goods. Sharper increases in food and fuel prices could increase the risk of unrest in some regions, from Africa to Latin America, and levels of food security could decrease.
Trade and logistics disruption
Countries neighboring Ukraine experience disruptions in trade, remittances and supplies. In addition, the influx of refugees from Ukraine is putting pressure on their economy and infrastructure. Changes in exchange rates can affect the cost of imported products. If the national currency is devalued, the cost of imports increases, which can lead to inflation.
Volatility in the markets
The war caused a decline in business confidence and increased uncertainty, leading to volatility in financial markets. Volatility, as a measure of the variability of the prices of assets or financial instruments over a period of time, in this context reflects large price swings in short periods of time. This could lead to increased capital outflows from emerging market countries as investors seek to avoid increased risk and volatility.
Long-term economic and geopolitical consequences
Among the long-term economic consequences of the war are continuous damage to Ukraine’s infrastructure, loss of labor and reduced investment.
The war can radically change the world economic and geopolitical order in the event of a shift in trade in energy carriers, restructuring of supply chains, fragmentation of payment systems and revision of the structure of currency reserves by countries. Rising geopolitical tensions further increase the risks of increased economic fragmentation, especially in trade and technology.
War could disrupt existing supply chains, affecting global trade and economic integration. Changes in energy trade, logistics and the structure of currency reserves can occur through several mechanisms. In the event of a change in the terms of trade in energy resources (for example, a shift in the supply of oil and gas), the world economy may reassess its dependencies and redistribute reserves. War could disrupt the established logistics system, affecting world trade and economic integration. ]The likely distribution of payment networks between countries may affect financial flows and foreign exchange reserves.
These factors can cause profound changes in the world economy and geopolitics, and it is difficult to assess their consequences. However, it is already obvious to what extent the war in Ukraine determines the instability of the world economy and may have long-term consequences.
According to the baseline forecast, the global economy will continue to grow at 3.2% in 2024 and 2025, the same pace as in 2023. Some acceleration is expected in advanced economies, while emerging and developing economies may slow their growth. Global inflation will also decline, and advanced economies will return to their inflation targets. In general, it can already be stated that the world economy has demonstrated remarkable resilience, despite the increase in interest rates by central banks in order to restore price stability.
Why is GDP growing?
The war in Ukraine has a significant negative impact on the world economy. It has driven up energy and food prices, disrupted supply chains and undermined business confidence. This led to lower growth and higher inflation in many countries.
At the same time, world GDP is growing and the International Monetary Fund (IMF) predicts its growth by 3.1% this year. A natural question arises: how, against the background of economic upheavals caused by the war, does this indicator increase in a number of countries?
The war in Ukraine forced many countries to increase their defense budgets. IA “FACT” provided corresponding infographic on this issue.
The increase in arms spending has had a positive effect on GDP, as government spending is a component of aggregate demand that stimulates economic activity. The multiplier effect worked: every dollar spent on defense generated additional spending in other sectors of the economy through job creation and increased incomes. Investments in military technology have led to the development of new technologies that can find applications in the civilian sector. This contributes to overall technological progress and increases the productivity of the economy.
Tatyana Morarash
