World economy shocked by the war in Ukraine

The global economy is being hit hard by Russia’s invasion of Ukraine and the resulting surge in energy prices. In the economies of Europe – particularly in Central and Eastern Europe – economic development is being particularly affected due to geographical proximity and high dependence on Russian natural gas. But the economic impact of the war is also being felt in other regions of the world. For example, the war and sanctions against Russia are increasing the already existing bottlenecks in global supply chains. Ukraine and Russia are major suppliers of various raw materials needed for key production steps. This is likely to lead to production delays around the world in the coming months and push inflation up further. Food prices will also remain significantly elevated due to fears of reduced exports of grains or raw materials for fertilizers from Ukraine and Russia.

My forecast is based on the assumption that the war between Russia and Ukraine will continue for several weeks and months and that the sanctions will remain in place for the longer term. Political and economic developments in Russia and the region as a whole will remain a source of heightened uncertainty over the forecast period, dampening global economic development. Globally, inflation will remain high for the time being in view of the sharp rise in raw material prices. At least the Corona pandemic subsided, at least temporarily, in spring 2022. With the exception of China, measures to contain the pandemic have been largely lifted in most countries. However, the continuation of the recovery of the global economy from the effects of the pandemic is now being slowed by the Ukraine war and its economic consequences.

Final quarter of 2021 in Europe dominated by the corona pandemic

In the fourth quarter of 2021, economic activity in the advanced economies was heterogeneous. In the euro zone, economic activity cooled significantly as a result of a new wave of the pandemic, with the growth rate only o.3 percent compared with the previous quarter. The course of economic activity varied from country to country and was largely shaped by the timing and strength of corona waves and the measures taken to contain them in each case. However, the imposed or voluntary restrictions on social contact and economic activity were significantly lower than in previous pandemic waves. By contrast, overall economic output in the USA expanded strongly, with growth of 1.7% compared with the previous quarter. However, this significant growth was also due to a sharp increase in inventories. Following very low inventories in the summer, many companies apparently tried to replenish their stocks as best they could out of concern about continuing supply bottlenecks, but this is likely to have exacerbated existing supply chain problems in the short term. In Japan, too, GDP expanded by a strong 1.1% in the final quarter of 2021. The Japanese economy benefited above all from a return to significantly higher consumer spending and dynamic exports.

In many emerging countries, the economy grew only moderately in the fourth quarter of 2021. In various emerging countries, particularly Turkey, Brazil and – to a lesser extent – Russia, high inflation rates and economic policy measures to reduce them were the main factors slowing economic growth. In India, too, the economic recovery continued at a much slower pace. In China, the economy grew by 1.6 percent despite the smoldering debt problems in the real estate sector, even if the increase remained moderate compared with the pre-pandemic trend rates. Private consumption and exports in particular drove growth, while investment was unusually subdued for China.

Global trade in goods, which had recovered rapidly from the pandemic-related slump and had already exceeded pre-crisis levels by spring 2021, developed dynamically, rising by 2.5% in the fourth quarter compared with the previous quarter. year-on-year growth was 6.4%. The marked upturn in international merchandise trade was due not least to the fact that demand shifted from personal services, where consumption was reduced as a result of the pandemic, to tradable goods. The consumption structure is now expected to return to normal. Strong growth in world trade – driven in particular by strong demand in the United States – has contributed significantly to bottlenecks in international supply chains. The significant growth in demand meant that maritime transport capacity – be it ship capacity, container availability or handling capacity at ports -2021 was barely able to cope with additional volumes.

Exploding commodity prices and renewed supply bottlenecks lead to rising inflation

Russia’s invasion of Ukraine caused many prices for raw materials and agricultural products to explode. Brent crude oil rose in price from around $80 per barrel at the beginning of the year to over $120 at the beginning of March. European natural gas prices doubled in the same period, having already risen by a factor of four in the course of the previous year. Significant price increases were also seen for industrial raw materials and foodstuffs. Shortages of key raw materials and production losses in Ukraine are exacerbating the already existing problems in international supply chains. For example, further delays are expected in semiconductor production, leading to bottlenecks in the automotive industry in particular. While there were signs of a gradual easing of supply chain problems at the beginning of the year, Russia’s invasion of Ukraine is likely to exacerbate the bottlenecks again. Russia and Ukraine are also major grain growing countries. The war has significantly increased uncertainties as to whether farmers in the two countries will be able to regain the crop volumes of previous years and export them. As a result, grain prices have also skyrocketed. Concerns about food shortages have increased significantly, particularly in some emerging countries.

Against this background, producer prices in the manufacturing sector have once again increased significantly, having already risen sharply since spring 2021. In the USA and the euro zone they were around 9.8% and 11.7% higher respectively in January than a year earlier. Consumer price inflation also picked up again, having already risen sharply in many places during 2021. In the United States, inflation – which there was also fueled by noticeable fiscal stimulus in 2021 in addition to high raw material prices and price increases due to supply bottlenecks – climbed to 7.9% in February. Inflation in the euro zone also increased significantly to 5.8% most recently.

Compared with the previous year, most of the price increase was due in particular to the dramatically higher oil price. However, core inflation (inflation excluding energy and food prices) was also noticeably higher in February, particularly in the USA. In the United States, it was 6.4% year-on-year in February; in the euro zone, 2.7%. Inflation is not expected to fall rapidly; in fact, it is likely to rise in the course of the spring before rates are expected to decline gradually in view of weakening raw material prices and weakening economic momentum. The current supply bottlenecks should also be gradually overcome in the course of the year.

Difficult balancing act for monetary and fiscal policy

In view of high inflation and the gloomy economic outlook, central banks are faced with a dilemma similar to that previously encountered in the wake of the two oil price shocks in 1973 and 1979. The economic outlook, which was still quite favorable at the beginning of the year before the war in Ukraine, led central banks in most advanced economies to hold out the prospect of gradually less expansionary monetary policy for the current year in view of higher inflation. Central banks in the United Kingdom and South Korea have already decided to raise key interest rates for the first time in 2021. Central banks in Norway and various countries in Central and Eastern Europe have also taken their first interest rate steps in 2021. The U.S. Federal Reserve has now raised its key interest rates by a quarter of a percentage point for the first time since December 2018, following the outbreak of war in March 2022, and has also announced that it intends to begin the process of gradually reducing its balance sheet from the summer. The European Central Bank has also already taken a slightly less expansionary course. It phased out its securities purchases under the emergency purchase program launched at the start of the pandemic in March. At the same time, it temporarily increased its general securities purchase program to EUR 40 billion per month, but is expected to phase this out next summer. An increase in key interest rates is expected towards the end of the current year. However, inflation in both the USA and the euro zone is not expected to fall gradually toward the central banks’ two percent target until 2023.

In Japan, inflationary pressures have also become somewhat higher, but they remain low compared with other advanced economies, so monetary policy is not expected to tighten until towards the end of the forecast period. In various emerging economies, such as Turkey, Brazil and Russia, inflation rates have skyrocketed, in some cases dramatically, and key interest rates have already been raised significantly.

After governments had mitigated the economic consequences of the pandemic and the measures taken to combat it by means of expansive fiscal policies in the advanced economies – and to a lesser extent also in many emerging economies – in 2020 and 2021 through extensive additional spending and tax deferrals, no new economic stimulus measures are expected in this respect in the current year. However, in view of the war and higher energy and food prices, measures are likely to be taken in various countries to mitigate the impact on low- and middle-income households, for example. Several countries are also likely to see higher defense spending and accelerated energy restructuring in the medium term, which should result in deficits remaining elevated in many advanced economies.

In emerging economies, budget deficits, which have risen sharply since the pandemic, are being reduced only slowly despite the gradual economic recovery, although longer-term spending programs have often been put in place, as in advanced economies, aimed primarily at strengthening infrastructure.

Outlook: Slowdown in recovery accompanied by high inflation

The war in Ukraine and the extensive sanctions against Russia have noticeably clouded the global economic outlook. While household purchasing power is being reduced by high energy prices, high geopolitical uncertainty is likely to reduce companies’ propensity to invest. In addition, continuing supply chain problems will repeatedly lead to production delays in industry. The economy will therefore only grow slightly or stagnate in many places in the first half of 2022.

By contrast, positive impetus will come from the recovery as a result of the lifting of pandemic-related restrictions on social life. Most existing restrictions will be lifted or replaced by less far-reaching requirements by the start of the second quarter. Individual behavioral adjustments to avoid infection will also be significantly lower. In emerging markets, where vaccination campaigns to date may have used less effective vaccines, somewhat slower success in pandemic control can be expected. But even there, the remaining restrictions are likely to only marginally limit economic activity. China, on the other hand, is likely to continue to adhere to a much stronger containment policy than other countries, which is likely to repeatedly lead to the sealing off of entire cities and closures of factories or port facilities. This will help keep problems with international supply chains high through at least the first half of 2022.

During 2022, the problems are likely to gradually dissipate. Energy and commodity prices are also expected to gradually decline again from the summer onward, reducing inflationary pressures. Against this background, I expect the global economy to grow by only around three percent this year. In 2023, economic output is then expected to grow more strongly again by slightly more than four percent.


The greatest uncertainty factor for the economy lies in the further course of the war in Ukraine. For example, there could be a further escalation of the conflict, resulting in further sanctions or restrictions on oil and gas supplies from Russia. Economic development in the world and in Europe in particular would be further affected by this. However, an easing of the conflict – for example in the form of a ceasefire – is also conceivable, which would probably lead to an upturn in global economic development. However, the risk of geopolitical crises or even armed conflicts is also heightened in other regions of the world. In Asia, for example, geopolitical crises continue to smolder around Taiwan and the Korean peninsula.

With vaccination progress and the now dominant Omicron virus variant, which is usually associated with milder disease courses than other variants, the downside risks related to new pandemic waves have recently been reduced. However, new virus variants could lead to further waves of infection and, in particular, require the reintroduction of infection control measures if existing vaccines lose their effectiveness. Another negative risk for the economy is the longer than assumed persistence of problems in international supply chains, which would slow down the economic recovery and further increase inflation risks. Above all, there is the risk in this context of even more numerous than assumed factory or port closures in China in the course of pandemic control measures.  In addition, it is possible that the smoldering real estate crisis in China could worsen and spill over to the rest of the Chinese economy and other countries. Since Chinese real estate companies are highly leveraged and have high foreign borrowings, an increase in U.S. policy rates, for example, could worsen the situation. A real estate and financial crisis in China, given its relatively low financial linkages with the rest of the world, would probably not turn into a global financial crisis, but given the size of the Chinese economy, it would have a significant impact on the rest of the world through its goods markets. Other emerging and developing economies also face the risk that an increase in interest rates in the U.S. will lead to capital outflows. In the context of China, it is also important to mention the high level of political tension with the United States. The American need to limit China’s economic expansion and the associated increase in its international political influence has continued under the new American administration. In this environment, the risk of a renewed flare-up of the trade and economic conflict between the two great powers remains high, especially against the background of Western sanctions against Russia, which the Chinese government has so far not supported.


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