April 2022 World Economic Outlook: The Ugly face of War

Following the release of the IMF's most recent World Economic Outlook in January, new global developments have necessitated revisions to key indicator performance expectations. This driving development is Russia's invasion of Ukraine in late February, which has dealt a significant blow to global economic recovery. Following the shock of the pandemic, the global economy made significant strides in its recovery from a recession; however, the Russian-Ukraine crisis threatens this recovery.

Following the invasion, Ukraine has lost key infrastructure and human capital while sanctions have been imposed on the Russian economy. Russia is a major exporter of energy and metal products, while Ukraine, popularly known as the breadbasket of Europe, supplies key agricultural produce, including fertilizers. Both economies are expected to contract in 2022 (Russia -8.5% y/y, Ukraine: -35% y/y). As both economies are major global commodity producers, the war-induced supply disruption has engendered a commodity supercycle, worsening inflation, and destabilizing economies. As a result, the IMF downgraded its global growth projections for 2022 from 4.4% to 3.6%.

High inflation is another key theme we will see play out. Global inflation is expected to remain elevated for a longer period of time than previously predicted, owing to the effects of higher oil and gas prices as well as food prices that will last into 2023. As a result, the IMF increased its inflation estimate for advanced economies to 5.68% (Previously 2.33%) and emerging economies to 8.68% (Previously 4.90%).

Africa, as a continent, would feel the impact of the crisis through elevated food and energy prices. Egypt in Northern Africa relies on Russia for 80% of its wheat imports. Down south, food makes up 40% of the consumption basket in Sub-Saharan Africa (SSA). Due to the impact of the Ukraine-Russia crisis on food and fuel in the region (SSA), the Fund raised its inflation expectation to 12.18% (from 8.6% previously). In contrast, growth expectations at 3.8% remained as higher growth estimates for oil exporters and some low-income countries (Ethiopia, DR Congo, etc.) offset the lower estimates for middle-income countries (South Africa, Ghana etc.).

Conclusively, while a quick resolution to the war could reduce commodity prices and alleviate supply disruptions, escalation could lead to famine. Rising inflation in the short to medium term may prompt more aggressive rate hikes, putting net-importers of oil and food in a more precarious position. In the long run, a more hostile global economy may drive countries to adopt more protectionist policies, endangering globalization and creating trade barriers.