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Russia-Ukraine Crisis: This attack will have a double effect on the global economy, read the detail report

Dispute between Russia and Ukraine (Russia-Ukraine Crisis) continues to grow. The global economy getting bored during the corona pandemicGlobal Economy) for it is not good. Professor Steve Schifferes of the University of London has prepared a great report about the impact of this war on the global economy. It has been said in this report that the invasion of Ukraine has been done at a time when the world economy is going through a critical phase and is beginning to recover from the havoc of Kovid. This war of Russia can now have far-reaching economic consequences, as it will cause financial markets to collapse and oil prices to rise. A worrying comparison of this development can be made to the 1973 Yom Kippur War in the Middle East, which led to the oil crisis. It shook the world economy to its foundations and signaled the end of the economic boom that had contributed significantly to reducing unemployment and raising living standards.

It is true that today the world economy is much larger than it was at that time, but in recent decades it has been growing very slowly. And the pandemic has dealt a big blow in the past two years, forcing governments to spend huge sums of money to revive their economies. Now, despite some signs of recovery, risks of high inflation and low growth remain, large debts limiting the ability of many governments to intervene. Rising energy costs and continuing disruptions in supply chains continue to be major drivers of the weak economic situation – both of which will be worsened by the Ukraine crisis. Russia is the EU’s largest supplier of gas and oil, and higher energy costs mean more expensive transportation, affecting the movement of all kinds of goods.

Double attack of inflation and low growth rate

But perhaps the biggest risk to the world economy is that if this crisis continues for a long time, it can put the world in a double stalemate. High inflation and low economic growth can worsen the cost of living. It is already affecting many consumers. It also presents a dilemma for central banks that have been pumping money into the economy for the past two years due to the pandemic. Most are now planning to gradually withdraw this help, as well as gradually increase interest rates to curb inflation.

Increasing interest rate will further weaken the economy

If inflation continues to rise and central banks increase interest rates dramatically, the economy will weaken further. During the crisis of 1970, the US Federal Reserve raised interest rates to 10% by 1978, causing a deep recession. In Britain the following year, Bank of England interest rates reached 17%, causing a sharp economic decline.

Europe is heavily dependent on Russia for energy

The expectation that inflationary pressures will ease by the middle of 2022 is no longer being fulfilled. Russia and Ukraine are among the world’s largest exporters of wheat and many countries (especially in Europe) depend on Russian oil and gas, so energy and food prices may continue to rise further.

If inflation rises, there will be a demand to increase the salary

It is not only the increase in the rate of inflation that matters, but there is also the expectation of the people that it will increase further. This can lead to a “wage-value chain” where people demand higher wages to compensate for the higher cost of living, forcing companies to further increase the prices of their products to pay higher wages. have to be. Central banks are then forced to raise interest rates even higher. In this way this cycle continues.

government spending may drop

Inflation also means that government spending may fall in real terms, the level of public services may have to be reduced and the wages of public sector employees may be reduced. So, if firms feel they cannot raise prices enough to compensate for higher wages, they may be tempted to cut their workforce, which can increase unemployment.

impact on global stock market

While central banks have been pouring huge amounts of money into financial markets to help stabilize a weakening economy, one effect has been that stock markets have been remarkably upbeat over the past decade, rising by an average of about 10% each year. Hui. Stocks started falling this year when central banks announced they would reduce this support, and markets have fallen further since the invasion of Ukraine. If the inflationary recession returns, central banks will have to reduce their support even more sharply, so a slowing economy will affect corporate profits and further drive down stock prices (though energy stocks will rise). This in turn can erode investment and business confidence, leading to fewer new jobs. For many people who own stocks or other assets, rising prices often lead to the “money effect,” where people are more confident about spending (and borrowing) money, especially on larger items. Therefore, weak markets will affect economic growth as well as the viability of pension schemes on which many people depend.

What will be the political and human consequences?

There is much uncertainty about the political and humanitarian consequences of Russia’s attack on Ukraine, and the world must also be prepared for serious economic impacts. Europe is likely to come first in the path of any economic storm, partly because of its greater reliance on Russian energy supplies as well as its geographic proximity to the war at its doorstep.

The alliance between Russia and China will strengthen both the economies.

In the US, any economic hardship could further weaken the Biden administration and strengthen separatist, America-first ideas. Meanwhile, a global alliance between Russia and China could further strengthen both economies, eliminate any impact of sanctions, and bolster their military and economic might.

Also read, Bank of Baroda hikes interest rate on savings and fixed deposits, new rates applicable from February 25

Also read, Russo-Ukraine war may cost you a vehicle to buy, with increasing input costs, the crisis in semiconductors will deepen

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Anjali

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