Following Vladimir Putin’s decision to invade Ukraine, Russia has become the most sanctioned economy in the world, with developed nations severing ties and forbidding any further business activity with the largest state on the planet. Nonetheless, the sanctions and the conflict itself are predicted to affect not only Russia, Ukraine and the neighboring states but the entire world as well as those countries that have deep roots in the global economy.
Today, the global economy has already started to face a serious decline with far-reaching ramifications. Slower growth and inflation spikes are the first consequences to have been encountered by ordinary people. Experts believe the conflict will have much worse consequences for Europe and the world than the COVID-19 crisis. Why does the conflict affect so many states? What is the ‘global economy’ concept and what is the prognosis for economic outputs in the near future? You can learn more from our overview.
What is the global economy?
The term ‘global economy’ refers to the globally interrelated economic activity that occurs across numerous nations. These economic operations have the potential to benefit or harm those countries concerned.
It is also worth noting that the term involves statistical values too. This means that experts, analysts, and government officials can make use of global economy data to analyze the current situation in the world and attempt to forecast the trends we may witness in the near future.
Central banks are some of the most important entities in the global economy since they can guarantee economic and financial stability. They administer monetary policies that guide a nation’s economy and achieve various economic goals including the control of inflation and currency exchange rates.
Largest economies in the world
A country’s economic power is determined by its gross domestic product (GDP), i.e., the entire amount of revenue generated in the country through the selling of goods and services. The list of the largest economies is determined by using GDP.
This is the 2020 list of the world’s top 10 economies.
Fig.1. World’s largest economies in terms of GDP
Source: CEOWORLD
Fig.2.Top 10 weakest economies in terms of GDP
Source: CEOWORLD
Fig.3.Top 10 countries with the highest inflation rate in 2021
Source: Trading Economics
Effects of the Russian invasion on global economy: an overview of experts’ opinions
While opinions regarding the future of the global economy after Russia unleashed a war in neighboring Ukraine vary, top international funding organizations, think-tanks and journalists tend to agree on its damaging influence on consumer prices and an overall decrease in buying power and production outputs.
According to Bloomberg’s economist, Tom Orlik, the cumulative effects of the conflict in Ukraine and the COVID-19 crisis will result in 2022 being a year of reduced growth, greater inflation, and increased uncertainty for the global economy. However, in order to fall into recession, the global economy would need to undergo further shocks. Potential catalysts include Russia shutting off Europe’s gas supplies or China’s lockdown spreading from Shanghai to other big cities.
Based on a Financial Times study, in 2022 the global economy will face slower growth and high inflation, or stagflation, with a slowdown in the recovery from the pandemic.
The IMF reduced its global growth forecasts for 2022 and 2023, claiming that the economic fallout from Russia’s invasion of Ukraine will proliferate far and wide.
However, some nations will be hurt more than others while others will be spared entirely.
According to the World Bank, the global economy will increase by 2.9% in 2022 compared to an increase of 5.7% in 2021.
World Bank President, David Malpass, believes neighboring European and Central Asian nations could also be affected. As fuel costs climb, consumers in developed countries are expected to cut down on expenditure this year.
Policymakers have yet to figure out how to deal with rapidly rising prices as well as the risk of increasing interest rates at a time when debt levels are already high.
According to the World Trade Organization, in the worst-case scenario, Russia’s invasion of Ukraine may cut long-term global GDP by 5%. However, given the close financial ties between China and the United States, this is fairly unlikely since, according to estimates from Rhodium Group, the countries had invested a total of US$3.3 trillion in each other’s stocks and bonds by the end of 2020.
Blackrock Chairman Larry Fink has said that the Russian invasion of Ukraine has put a stop to the globalization that we have witnessed over the last three decades. At the same time, U.S. Treasury Secretary Janet Yellen recently mentioned that the U.S. is closely monitoring China’s political and economic relations with Russia.
China COVID-19 lockdown and its impact on the global economy
In March, after it was announced that the highly infectious Omicron coronavirus strain was spreading quickly in China, the nation showed a determination to adhere to its zero-Covid approach. Lockdowns, like those imposed in Shanghai, pose a threat to consumer expenditure, investments, and production.
Shanghai started to report COVID-19 cases when the restrictions were lifted on June 1 even among citizens living outside restricted regions. As a consequence, a growing number of communities have been put under strict lockdown.
Analysts are sounding the alarm, but claim that investors have failed to adequately consider the global economic consequences of these protracted lockdown measures.
The extended lockdown in Shanghai, a city of 25 million people and one of China’s top production and export hubs, is the most worrying as it persists into the summer of 2022.
Food shortages have left the world’s busiest port of Shanghai short-staffed. The port handled more than 20% of the country’s freight cargo in 2021 and is now closed. Food supplies that have been left in containers without refrigeration are deteriorating.
According to a study from the Chinese University of Hong Kong, the nation’s reaction to the current pandemic situation is expected to cost around US$46 billion in lost economic output every month, or 3.1% of GDP.
Global economy in low-income countries
- According to estimates provided by World Bank President David Malpass, 60% of low-income nations are already in debt difficulty or are in significant danger of becoming so.
- As a result of the Ukraine conflict, developing nations such as Sri Lanka, Tunisia and Ghana are amassing a great deal of debt. Higher borrowing rates, combined with rising food and energy prices, are making finance much more challenging for already impoverished countries.
- Rice farmers across Asia are cutting back on fertilizer use due to rising fertilizer costs which could ultimately lead to a fully-fledged food catastrophe if prices are not brought down.
- Prices of crop nutrients that play an important role in increasing food production increased dramatically in 2021 in India, Vietnam, and the Philippines. It is possible that using less fertilizer will result in lower crop yields thus causing shortages and higher prices.
- According to the forecasts by the International Rice Research Institute, yields could decline by 10% next season which may lead to 36 million tons of rice being lost, sufficient to feed 500 million people.
Final word
The COVID-19 crisis of 2020-2021 has had a serious impact on the global economy bringing consequences that will be felt for a long time. Just as the world was finally beginning to get back to normal, it has faced another blow with the conflict in Ukraine slowing down economic growth leading to high inflation and food shortages around the world. Added to this, the world’s busiest port of Shanghai is in lockdown as a result of spikes in coronavirus cases.
The forecasts are disappointing, especially for low-income countries, with developed nations mainly focusing on internal affairs and security in Europe.
