It is perhaps trite to talk about the economic fallout from the Ukraine crisis when Russia's war machine is intent on maximising civilian casualties and when a nation is being so brutally stripped of its sovereignty. Ukraine's southern city of Mariupol is now almost entirely razed, a throwback to Russia's obliteration of Aleppo and Grozny.
The wider economic consequences of creating the biggest refugee crisis on the continent of Europe since the second World War while accelerating energy prices at a time of already high inflation has no doubt been war-gamed by Vladimir Putin and his cronies. Moscow has been fighting a hybrid war against the West in the form of cyber attacks, disinformation campaigns, assassinations and election meddling for several years, a reaction to Nato's near constant encroachment on Russia since the unification of Germany in 1991.
Putin’s mis-step was to think Ukraine could be overwhelmed swiftly and that Western countries would be divided and muted in their response as in the past. The international boycott and isolation means Russia is now the most sanctioned country in the world.
It’s not obvious where all this leaves us: nearer a peace deal and a possible Russian climbdown or on the precipice of a prolonged war and a bigger refugee crisis? Here are five key economic channels where the crisis is likely play out.
Refugees
Resettling those fleeing war-torn Ukraine could cost $30 billion in the first year alone, a new report from the Center for Global Development has estimated. It also warns that a more permanent integration of millions of people would reshape Europe’s entire economy.
Accommodating families displaced by the war is a duty but the long-term expense could be huge and could put additional strain on housing, education and healthcare systems.
Conversely an influx of workers, particularly skilled ones, is likely to increase Europe’s output over time, spurring further growth, albeit at the expense of greater labour market competition.
Energy prices
Those arguing that the current upsurge in inflation would be temporary – a finite manifestation of the post-Covid unwind – were already on the back foot before Russia’s invasion of Ukraine threw global energy markets into disarray. The argument has now been put to bed.
We’re in the midst of an oil and gas price shock akin to those that rocked the world economy in the 1970s. Whether the price surge and the likely monetary policy response will result in stagflation – a period of high inflation and low growth – as it did in the 1970s remains to be seen.
Electricity and gas prices here are up 22.4 and 27.8 per cent respectively year on year, while home heating oil is up by 54 per cent. A worrying aspect to these numbers is that they don’t reflect the jump in wholesale energy prices being paid by energy retailers, meaning an even more painful pass-through to consumers is on the way.
Bord Gáis Energy's decision to increase its gas and electricity prices by 39 per cent and 27 per cent respectively, which will add €350 and €340 to the average bill in one sweep, is as sharp a rise as we've seen in decades.
Economic growth
Global growth, employment and monetary policy were expected to revert to pre-pandemic trends in 2023; that’s now out the window. We’re going to see a raft of forecast reversals in the coming weeks as regulators and think tanks reappraise the outlook.
The Organisation for Economic Co-operation and Development (OECD) started the ball rolling last week, saying the crisis would reduce gross domestic product (GDP) – the broadest measure of economic output – by 1.08 per cent globally, by 1.4 per cent in the euro zone and by 0.88 per cent in the United States.
We’ll get a more precise read on the Irish economy from the Economic and Social Research Institute (ESRI) this week. In its spring economic bulletin, due out on Wednesday, the institute is expected to downgrade its headline forecasts on the back of increased uncertainty and higher inflation while warning of the increased risk to the public finances. Lower growth means lower tax revenue.
Interest rates
On Wednesday last the US Federal Reserve began what many believe is the start of new era of interest rate hikes. The US central bank approved its first rate increase in more than three years, while noting the Ukraine crisis was "likely to create additional upward pressure on inflation and weigh on economic activity".
The less responsive European Central Bank has so far ruled out a rate increase but many view this as just posturing. The entire financial ecosystem has been weaned on low interest rates – stock markets, company earnings, government borrowing, mortgages. A significant shift in the other direction will have consequences, not least for mortgage holders here, most of whom already pay a premium over their European counterparts.
Food prices
While much of the focus has been on energy and transport prices, global food prices hit a record high in February, climbing 24 per cent from where they were a year ago, following a 4 per cent month-on-month rise.
This reflects the fact that Russia and Ukraine together produce about 30 per cent of food commodities such as wheat and maize.
A recent calculation by our consumer correspondent Conor Pope suggests the cost of an average weekly shop has climbed by €15. On an annual basis that means groceries could cost €780 more, which is not dissimilar to Bord Gáis Energy's estimates for the increase in the average energy bill.
