Editor's note: Recently, DotDotNews conducted an exclusive interview with ACCA's chief economist Michael Taylor on the economic impact of the Russia-Ukraine conflict. The following is the Q&A of this interview.
1. How do you come to the conclusion that the global GDP would be 3.25%, decline by 1%? Could you illustrate the calculation method or scenarios behind?
The calculation is based on the initial OECD estimate that in a full year the effect could be to reduce global GDP by 1.2 percentage points. So for 2022, assuming 10 months of this effect (the war starting towards the end of February) this would reduce global GDP by 1% this year. Almost certainly this will not be the case of course – it may be less or more than 1%, but it is important to give an order of magnitude. The effect will not be negligible but nor will it be recession like during the global financial crisis of 2007-09.
2. What is the most significant impact of the Russian-Ukrainian crisis on the economy?
The most significant impact is the effect on commodity prices, especially oil, natural gas and wheat. This is pushing inflation higher in virtually every country in the world, squeezing real incomes and slowing consumer spending. But Europe is especially vulnerable because of its dependency on Russian gas for its energy, while many African countries rely on wheat imports from Russia-Ukraine.
3. And your survey is conducted between 14 February and 1 March 2022, but the situation of the Russia-Ukraine conflict keeps changing. What are the new impacts on the global economy? Is it out of your expectation?
The duration and severity of the war will be the main determinant of the longer-term effect on the global economy. So far it looks like it will continue for some more months, which is in line with my initial expectations. The one bit of good news is that oil prices have not reached $130 per barrel as initially seemed possible but are closer to $100 p/b. The inflation and growth consequences of oil at $130p/b are much worse than at $100p/b.
The biggest risk to the current outlook is if Russian oil and (especially) natural gas supplies to Europe were cut off at any point this year. This would almost certainly plunge Germany into recession as gas supplies would have to be rationed to industry, reducing output. Growth in the euro-zone economy as a whole would stall or even contract slightly. The fact that Russia needs the revenue from oil and gas sales as much as Europe needs the oil and gas reduces the risk of supplies being cut off, but it is still a material risk.
4. What do you mean by "economic impact of Russia-Ukraine conflict not fully reflected"? What will be the long-term, deep-seated impact? And How should different economies do in response?
By the 'not fully reflected' comment I merely wanted to make it clear that some of the survey was conducted before the 24 February invasion so the survey would not capture the overall shock effect of the start of the war.
There will be many long-term consequences, some of which will only become apparent over time. But two are already clear. First, defence spending in Europe will increase significantly – there has already been a dramatic shift in defence policy by the new German government. Second, energy policy in many countries will pivot towards greater self-sufficiency and – in Europe – away from dependence on Russian oil and gas. Investment in renewables (solar and wind) will be boosted and in some cases, such as the UK, nuclear energy is now seen as a long-term solution.
Both increased defence spending and a shift in energy policy suggest higher government spending in coming years –funded with higher levels of taxation.
5. If the Russia-Ukraine conflict remains stalemate, will the impact on the global economy be diminishing marginally? If so, when will this happen?
Over time economies adjust to new circumstances so yes the effect will diminish. If the conflict persists the main effect on the global economy will be this year, followed by a lesser effect in 2023 as inflation stays relatively high. But by late 2023 and into 2024 inflation should have fallen back and Europe should have greatly reduced its dependence on Russian commodities. In addition, by then the high prices for wheat will have encouraged greater supply and reduced prices. So (apart from in Russia and Ukraine) the economic consequences will be concentrated over an 18-24 month period.
6. You mention that "Central banks in developed economies face difficult choices that could lead to policies that are too tight, triggering a recession, or too loose, leading to inflation and inflation expectations". How do you comment on the current policy choices of China and the United States?
For China the dilemma is less acute than elsewhere – inflation is not so much of a problem, while economic growth is relatively weak as a result of the difficulties in the all-important property sector and the impact of the zero-COVID policy, especially when cities as economically important as Shanghai are affected. So for the PBoC, the arguments are more clearly in favor of stimulating growth; the challenge is to do so without encouraging excessive borrowing and debt problems.
For the US the argument goes the other way. The Federal Reserve has allowed inflation to reach 8.5% by March, way above the 2% target and has only just begun to tighten monetary policy. Expectations are that US interest rates will rise steadily this year and into 2023 to at least 2.5% (from 0.25% now). A US recession is not likely but economic growth will slow this year as a result of both higher interest rates and the effects of the war in Ukraine.
7. You mention that "Future policymaking requires careful consideration and careful stress testing on a daily, weekly and monthly basis. But in the implementation of the policy". The introduction and implementation of policies always take time, it is difficult to make immediate adjustments. How should the government deal with this situation?
The best policymakers can do is be as flexible as possible (as they generally were at the start of the pandemic in 2020). In addition, the communication of policy decisions at times of great uncertainty is also very important as this will help anchor expectations, especially about inflation.
(DotDotNews reporter: Yang Chuyi)
Comment