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Russia-Ukraine war seeds global landscape of uncertainty and volatility

The war has upended global trade, reset the financial markets, worsened supply chain disruptions, and eclipsed any hope for economic recovery. Photo: Reuters

The war has upended global trade, reset the financial markets, worsened supply chain disruptions, and eclipsed any hope for economic recovery. Photo: Reuters

Published Mar 20, 2022


WHEN the dust settles after the guns have stopped in eastern Europe, the world will be a very different place than it was when the year began as it will be characterised by uncertainty and more volatility.

Russia’s “special military operation” in Ukraine, ongoing for three weeks now, has left a significant trail of destruction in its wake.

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The war has upended global trade, reset the financial markets, worsened supply chain disruptions, and eclipsed any hope for economic recovery.

The hope of a robust global economic recovery and a sight of an end of the Covid-19 pandemic were shattered as soon as the first shelling happened in Donbas on February 24.

Since then, inflation has risen to its highest level in more than a decade, with prices of essential commodities such as oil, natural gas and wheat soaring to levels not seen since the global financial crisis.

As a result, economists this week have warned that a further rise in oil and grain prices directly pushes up prices of key goods within consumer inflation, such as fuel and bread.

Absa’s Corporate and Investment Bank senior economist Peter Worthington said this will have adverse implications for South Africa’s headline consumer inflation.

Absa has thus revised upwards its inflation forecast through to end-2023 given the high uncertainty on where commodity prices and supply chains will settle over the medium term.

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“In addition, sharply higher commodity prices could also lead to second-order inflationary effects, for example as public transport or food prices are increased to offset firms’ higher fuel costs,” Worthington said.

“And supply chain disruptions to semiconductor chips could push up prices of cars, TVs and computers.”

The per-barrel price of Brent crude breached the $100 mark for the first time since 2014 this month, surging to $139 (R2 081) on March 7 after the US and its European allies weighed banning Russian oil imports.

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Russia and Ukraine, the two warring neighbouring countries, together account for 12 percent of global oil production, 14 percent of wheat production, 17 percent of natural gas production, and 70 percent of neon production.

Oil exports are essential for meeting global oil demand; natural gas is especially important for Europe, which gets more than one-third of its natural gas from Russia; wheat is vital for many emerging markets; and neon is critical for the production of semiconductors.

Wheat prices have surged by about 20 percent since the start of the Russian invasion of Ukraine, whereas both countries account for almost 80 percent of the world’s sunflower oil shipments.

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With such essential commodities at stake, the global economy will suffer consequences that could linger on for a prolonged period of time, way after the war has ended.

Moody’s Analytics chief European economist Gaurav Ganguly said annual growth in consumer inflation would be 5 percent this year if oil prices were higher than $100 per barrel, compared with the baseline’s 4.8 percent.

“We could be looking at a period of global stagflation, with price pressures elevated due to supply shocks but with growth slowing as disposable incomes are squeezed, consumption falls, and investment appetite declines,” Ganguly said.

Higher inflationary pressures resulting from the Russian invasion complicates the situation for central banks around the world after relaxing monetary policy to shore up the impact of the pandemic.

In South Africa, the SA Reserve Bank (Sarb) is expected to tighten its monetary policy and hike interest rates again by at least 25 basis points to 4.25 percent in a bid to slow inflation.

The Sarb will be taking its cue from the US Federal Reserve which raised interest rates for the first time in four years this week, from 0.25 percent to 0.5 percent while it will begin to reduce its holdings of US treasuries.

Investec chief economist Annabel Bishop said South Africa’s forward rate agreements have fully factored in a 25 basis points lift the repo rate this month, and were building in another one for May and yet another for July.

“Indeed, a 25 basis points hike is factored in by the markets for every monetary policy committee meeting this year, if not 50 basis points hikes at some MPC meetings,” she said.

South Africa may not have sent boots on the ground to fight the Russians in Ukraine, but the country will pay the price of the war, one way or another.

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