About the author: Dana M. Peterson is the chief economist of The Conference Board.
Russia’s war against Ukraine is a horrific event that requires huge human and economic costs for both nations. However, the tragedies of regional conflict will also reverberate globally, inflicting more damage than many realize beyond the grizzly images of violence and misery we see on television and on the Internet. These ripples will include shortages, supply chain disruptions, higher prices, slower growth, employment strikes and perhaps even global recession. The United States will not be exempt from these shocks.
Many nations, particularly the United States, will suffer the adverse effects of the war due to rising inflation. Russia and Ukraine are the world’s leading exporters of energy (such as crude oil, natural gas), cereals (wheat, oats, rye, barley, corn) and metals used as inputs for semiconductor production (nickel, gold). If battles, destruction, sanctions or the blockade of oil tankers in the Black Sea prevent these products from reaching global markets, then the world should anticipate higher prices.
Consumers will suffer the effects of the shortage of Russian and Ukrainian raw materials. Gasoline prices may continue to rise due to the surge in global crude oil and ethanol prices. Trips to the supermarket will become even more expensive as the cost of cereals, bread and meat increases with the prices of cereals. If Ukraine is unable to plant this spring, a global food shortage could occur, risking famine in low-income economies and food insecurity for US households. Rising metal prices for computer chip components will mean more expensive cars, appliances, cell phones and other high-tech goods.
The war will also exacerbate the arrears of the Covid-19 supply chain and the inflation that has resulted from it. Such disruptions are likely to be most acute in Western, Central and Eastern Europe as Russia and Ukraine are the main suppliers of intermediate goods to those regions. However, we have learned from the pandemic that arrears on the other side of the globe can affect wallets at home. If factories continue to close in Europe during the war, then fewer goods will be exported to the shores of the United States. Such arrears also fuel higher inflation.
Not only does the price of goods levitate, but also those of services, delaying the full rebound of these industries from the pandemic. While the US economy grew 5.7% yoy in 2021, not all sectors benefited. Indeed, in-person services are still recovering from mobility restrictions and the fear factor of the pandemic. Folding the Impact of War: Restaurants will continue to pass high food costs from higher grain and transportation prices to diners; air fares will rise with jet fuel; and the taxi fare could increase beyond just the rush hour price increase.
The new waves of inflation due to the war in Ukraine and the persistent effects of the pandemic bode well for consumer spending. Gasoline prices are rising just before the holiday season. Cash-strapped consumers can forgo road trips and other discretionary trips. Fewer people can return to the office, dampening the expectations of an economic recovery in the city centers. Households can significantly reduce spending because prices are rising too fast. If consumers stop spending, then one of the main drivers of US economic activity will stall, signaling slower growth in real gross domestic product.
Enter the Federal Reserve. Its Federal Open Market Committee has now begun to raise rates to stem the rising inflationary wave linked to the pandemic. If policy makers’ initial efforts to contain inflation are insufficient, they could raise rates more aggressively. Indeed, rate hikes may address demand-side drivers of inflation, namely high employment, rising wages, and past cash injections from pandemic-era fiscal stimulus, which stimulate all consumption. But the Fed can do little to counter supply-side inflationary pressures from disrupted supply chains and shortages of raw materials. Overall, the conflict in Eastern Europe exacerbates the risk of the Fed going too fast, too fast, slowing the economy more than expected.
Then there are the risks of a global recession: commodity market shocks or the widening of the war could trigger a doomsday scenario for the global economy. Serious damage to Ukrainian infrastructure and extended sanctions to Russia on commodity exports could skyrocket world prices for food, energy and metals. If other economies are unable to step in to fill the gaps, then these inflationary gaps and spirals could bring down the global and US economies. Likewise, widening the conflict to include NATO could also trigger a global recession as labor and resources are reused for the war effort rather than for GDP-enhancing activities such as investments in infrastructure, education or renewable energy.
Given the negative spillover effects of the war, the Conference Board downgraded its growth prospects and raised inflation expectations. We propose that US real GDP growth in 2022 could be half to one full percentage point weaker than expected. Much of the slowdown reflects potentially rampant increases in inflation and a powerful reaction from the Fed to halt it. We are certainly close to the extreme limit of many forecasting ranges, but if the Russia-Ukraine conflict persists, other forecasters could move their projections closer to ours.
The bottom line is that as long as the war smolders in Eastern Europe, it will cloud the economic picture of the entire globe. In this environment, CEOs and their executives must prepare for continued uncertainty and turn once again to protect their margins, investors, talent and customers. Whatever the plan, from rising prices, redirecting supply chains, disrupting business, divesting or even keeping track, companies need to be thoughtful, strategic, transparent and highly communicative in their approach. What the world cannot afford to do is look the other way.
Guest comments like this one are written by authors outside the editors of Barron’s and MarketWatch. They reflect the views and opinions of the authors. Send comments and other feedback to email@example.com.