A Putin shock to the world economy

Government has rightly committed itself to limit energy prices growth in 2022, although no government can cushion all inflationary effects

Russian President Vladimir Putin
Russian President Vladimir Putin

The Russia, Ukraine crisis fuelled high inflation and slow growth in consumer spending worldwide. It has triggered turmoil in the world financial markets. No country will be spared by imported inflation and global trade disruptions. Commodity prices were already surging before the Russian invasion due to a multitude of factors, namely the coronavirus pandemic, supply-chain disruptions and a recovering global demand.

Commodity prices

It is estimated that Russia and Ukraine account for nearly thirty percent of global wheat exports. The war is expected to severely impact grain production leading to huge spikes in global wheat prices. Nearly 40% percent of the EU’s electricity comes from power stations that work on fossil fuels – Russia is the biggest source of that kind of energy. Europe has clearly allowed itself to become heavily dependent on the importation of Russian natural gas. With Russia being one of the main suppliers of metal, everyday goods may also rise as a result of it – pushing the price of car components, and every-day goods – such as metal and aluminium cans upwards. 

Large food manufacturers, such as Nestle, have significant operations in Ukraine that have been severely disrupted by the war. Ukraine’s economy is expected to shrink by a whopping 45% this year. Fewer food supplies caused by the war may push the cost of food and energy up which might lead to increase in interest rates worldwide. As the borrowing of money gets heftier, consumers will have less money to spend, whilst mortgage repayment may rise. 

US - China

As the war drags on, fissures are expected in the Western alliance. A case in point is the way the US banned Russian energy imports, whilst the EU, heavily dependent on Russian energy, did not. The relationship between the US and China is also expected to worsen, with Russia becoming increasingly dependent on China in matters related primarily to finance and technology.

Oil prices up

According to Economist Intelligence Unit (EIU) estimates, oil prices are expected to remain above US$100 a barrel, gas prices are set to rise by at least 50% this year, prices of agriculture commodities will soar and global inflation will jump above 6% this year. 

The war is, and shall increasingly, continue to disrupt land-based trade routes between Asia and Europe and so will air ties between Russia and Europe thus severely disrupting supply chains worldwide.

The local scenario

Malta’s fortunes are no different to those of other countries. Recently, Finance Minister Clyde Caruana stated that the war in Ukraine has already cost Malta €200 million in projected price increases. Figures released by the National Statistics Office show an increase in food prices in March, pushing the annual inflation rate up to 4.5%, an increase from the 4.2% registered in February, according to the Harmonised Index of Consumer Prices. Freight costs are a headache. Government’s pledge, to extend the rent subsidy scheme to support companies that have invested in warehousing facilities to order in bulk, in an attempt to spread freight costs, would be a step in the right direction once implemented.

On a positive note

Relative to the EU average, inflation in Malta has increased moderately in 2021. Government has rightly committed itself to limit energy prices growth in 2022, although no government can cushion all inflationary effects. It is encouraging that according to the European Commission winter forecast, Malta’s GDP is set to grow by 6% in 2022, reaching pre-pandemic levels of economic activity by mid-year. The relaxation of restriction measures is resulting in a better consumer and business sentiment, whilst notable improvements are being registered in tourism. 

With a vaccination rate above 90%, Malta has managed to keep the virus at bay. Despite the pandemic, Malta’s economy and labour market remained vibrant.

An economic war

These are trying times for the world economy. We are witnessing an economic war with a huge impact worldwide. Unfortunately, Russia’s invasion of Ukraine will have lasting negative effects on the world economy. Russia shall probably be a pariah in the international community for a long time, even if an agreement between Russia and Ukraine is reached, whilst fear of another conflict shall keep the world economy on tenterhooks. And the biggest concern of all is the human loss of lives, with thousands of innocent civilians killed and millions displaced.