The war on Ukraine will have a severe effect on economies far beyond the immediate area of the conflict, according to new research from the European Bank for Reconstruction and Development (EBRD).
In its first economic forecast since the war began, the EBRD has cut its growth forecast for 2022 for the regions where it operates by more than half – to 1.7 per cent, down by 2.5 per cent on its previous forecast.
It forecasts sturdier growth across its regions of 5 per cent in 2023.
Describing the effects of the war as ‘the greatest supply shock since at least the early 1970s,’ the Bank predicts that the increased cost for commodities such as food, oil, gas and metals will have a profound impact on economies, particularly those in lower income countries. Russia and Ukraine supply a disproportionately high share of commodities, including wheat, corn, fertiliser, titanium and nickel.
The EBRD works in many emerging economies, stretching across eastern, central and south-eastern Europe, Central Asia, Turkey and the southern and eastern Mediterranean. The new forecasts are based on a series of assumptions about events in the coming months, and therefore have a high degree of uncertainty.
Nevertheless, it is clear that many economies will be severely hit and that some will suffer more than others.
For example, the EBRD expects Ukraine’s GDP to fall by 20 per cent this year and Russia’s by 10 per cent. Ukraine’s GDP had been forecast to grow by 3.5 per cent this year, and Russia’s by 3 per cent.
The EBRD has not been doing new business in Russia since 2014, and earlier this week announced that it had closed its offices in Moscow as well as in Minsk, the capital of Belarus. The Bank has condemned the invasion of Ukraine and announced an initial €2 billion resilience package to support its economy and its affected neighbours.
Areas highlighted by the forecast include:
- Economies in Central Asia badly hit by the fall in the value of the rouble and restrictions on its convertibility, as they are heavily dependent on remittances received from Russia.
- North African economies and Lebanon greatly exposed to the reduced global supply of wheat, forcing up prices.
- Economies in central Europe closely integrated into manufacturing supply chains in Ukraine, with a serious risk of disruption.
- Pressures on currencies in the Caucasus and Central Asia as markets have been reassessing geo-political risks
- And tourism is expected to take a hit in many countries including Armenia, Estonia, Georgia and Montenegro.
Beata Javorcik, Chief Economist of the EBRD, said: “The war on Ukraine has been having a profound impact on the economies in the EBRD regions as well as globally. Inflationary pressures were already exceptionally high and it seems certain they will now be worse, which will have a disproportionate affect on many of the lower income countries where we work.”
Europe has also seen the greatest force displacement of people since the Second World War, and the report examines the potential consequences of this migration.
Skilled workers from Ukraine may provide a boost to some economies in the longer term, particularly in countries with ageing populations. In the short-term, economies are facing fiscal pressures and administrative challenges as they scale up the provision of housing, healthcare and schooling.
A number of countries have also announced higher targets for military spending since the Russian Federation-led invasion of Ukraine.
The EBRD forecasts assume that a ceasefire is brokered within a couple of months, followed soon after by the start of a major reconstruction effort in Ukraine which will bring GDP by end-2023 back close to, but still below, pre-war levels.
Sanctions on Russia are expected to remain for the foreseeable future, condemning the Russian economy to stagnation in 2023 (after a sharp GDP drop in 2022), with negative spill overs for a number of neighbouring countries in eastern Europe, the Caucasus and Central Asia.
With so much uncertainty, the Bank intends to produce a further forecast in the next couple of months, taking into account further developments.