Consequences of the Ukraine war: Researchers predict a growth shock

Status: 03/17/2022 11:04 AM

Because of the Ukraine war, economists from IfW Germany expect growth of just 2.1% this year. According to the Organization for Economic Co-operation and Development, the global economy is also likely to grow less aggressively.

The Kiel Institute for the World Economy (IfW) almost halved its already weak growth forecast for 2022 in light of Russia’s war against Ukraine. Economists announced today that GDP is likely to rise by only 2.1 percent this year. “The German economy is once again facing severe headwinds,” say the researchers.

In December, IfW already revised its forecast downward from 5.1 to 4 percent in light of the ongoing Corona pandemic and ongoing delivery bottlenecks. Against the background of energy prices, which have risen more sharply since the outbreak of the war, the institute also forecasts an inflation rate of 5.8 percent – the highest value since German reunification more than 30 years ago.

Declining consumption and dwindling sales

Economists wrote in their forecast: “The shock to Ukraine delays a return to pre-corona levels in the second half of the year.” “The production capacities will not be fully exploited until the end of the year, and therefore the economic output will be less than the potential,” he added. In IfW’s view, a portion of the lost production should be compensated for in 2023, so slightly stronger growth of 3.5 (previously 3.3 percent) is now expected for next year.

The IFW calculates that the economic upheaval from the Ukraine war has cost Germany about €90 billion in economic output this year and next. “The war in Ukraine has led to higher prices for raw materials, new supply bottlenecks, and diminished sales opportunities.” According to IfW, higher energy prices reduce the purchasing power of disposable income and thus discourage private consumption.

60% of companies reported delivery problems

In addition, delivery bottlenecks are a significant burden on the highly networked industry. About 60 percent of companies have reported additional supply chain and logistics disruptions as a result of the war, according to a survey published today by the Federation of German Chambers of Industry and Commerce (DIHK). For medium-sized industrial companies in particular, the situation sometimes gets significantly worse. According to DIHK, they get fewer primary products or – as with energy in particular – only at very high prices and can only partly pass the cost increases on to their customers.

“All of this is affecting the economy at a point when the mitigating effects of the epidemic are receding and a strong recovery is being planned,” IFW said. In 2021, economic growth was 2.9%. In the first year of Corona 2020, the largest European economy contracted by 4.6 percent.

Economists make it clear that the German economy is unlikely to fall into recession again this year with “strong post-pandemic buoyancy forces”. Special factors such as massive consumer savings and peak demand backlogs cushion Ukraine’s shock.

Inflation higher than ever since the fall of the wall?

IfW experts do not provide all the details regarding pricing. “Inflation is likely to be 5.8 percent this year, the highest ever in a united Germany,” she said. Even if raw material prices stop rising and supply bottlenecks gradually ease, inflation is likely to remain high at 3.4 percent next year. Inflation in the euro zone reached its highest level in February. Consumer prices rose 5.9 percent compared to the same month last year, European statistics office Eurostat announced today after the final data.

In addition, the invasion of Russia is likely to have an impact not only on Germany and Europe, but also on the world economy. According to the Organization for Economic Co-operation and Development, the war will slow the global economy and increase inflation. The group of industrialized nations said in Paris today that global economic growth is likely to decline by more than one percentage point in 2022.

According to the Organization for Economic Co-operation and Development, global inflation could rise by about 2.5 percentage points in the first full year after the conflict began. The impact of the shocks varies from region to region, with European economies in general being the hardest hit – particularly those that share borders with Russia or Ukraine.

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