After getting battered by the pandemic, supply chain chokeholds and leaps in prices, the global economy is poised to be sent on yet another unpredictable course by an armed clash on Europe’s border.
Even before the Kremlin ordered Russian troops into separatist territories of Ukraine on Monday, the tension had taken a toll. The promise of punishing sanctions in return by President Biden and the potential for Russian retaliation had already pushed down stock returns and driven up gas prices.
An outright attack by Russian troops could cause dizzying spikes in energy and food prices, fuel inflation fears and spook investors, a combination that threatens investment and growth in economies around the world.
However harsh the effects, the immediate impact will be nowhere near as devastating as the sudden economic shutdowns first caused by the coronavirus in 2020. Russia is a transcontinental behemoth with 146 million people and a huge nuclear arsenal, as well as a key supplier of the oil, gas and raw materials that keep the world’s factories running. But unlike China, which is a manufacturing powerhouse and intimately woven into intricate supply chains, Russia is a minor player in the global economy.
spikes in heating and gas bills, which are already soaring. Natural gas reserves are at less than a third of capacity, with weeks of cold weather ahead, and European leaders have already accused Russia’s president, Vladimir V. Putin, of reducing supplies to gain a political edge.
United Nations report. Russia is the world’s largest supplier of wheat, and together with Ukraine, accounts for nearly a quarter of total global exports. For some countries, the dependence is much greater. That flow of grain makes up more than 70 percent of Egypt and Turkey’s total wheat imports.
This will put further strain on Turkey, which is already in the middle of an economic crisis and struggling with inflation that is running close to 50 percent, with skyrocketing food, fuel and electricity prices.
And as usual, the burden falls heaviest on the most vulnerable. “Poorer people spend a higher share of incomes on food and heating,” said Ian Goldin, a professor of globalization and development at Oxford University.
Ukraine, long known as the “breadbasket of Europe,” actually sends more than 40 percent of its wheat and corn exports to the Middle East or Africa, where there are worries that further food shortages and price increases could stoke social unrest.
Lebanon, for example, which is experiencing one of the most devastating economic crises in more than a century, gets more than half of its wheat from Ukraine, which is also the world’s largest exporter of seed oils like sunflower and rapeseed.
On Monday, the White House responded to Mr. Putin’s decision to recognize the independence of two Russian-backed territories in the country’s east by saying it would begin imposing limited sanctions on the so-called Donetsk and Luhansk People’s Republics. Jen Psaki, the White House press secretary, said Mr. Biden would soon issue an executive order prohibiting investment, trade and financing with people in those regions.
range of scenarios from mild to severe. The fallout on working-class families and Wall Street traders depends on how an invasion plays out: whether Russian troops stay near the border or attack the Ukrainian capital, Kyiv; whether the fighting lasts for days or months; what kind of Western sanctions are imposed; and whether Mr. Putin responds by withholding critical gas supplies from Europe or launching insidious cyberattacks.
“Think about it rolling out in stages,” said Julia Friedlander, director of the economic statecraft initiative at the Atlantic Council. “This is likely to play out as a slow motion drama.”
As became clear from the pandemic, minor interruptions in one region can generate major disruptions far away. Isolated shortages and price surges— whether of gas, wheat, aluminum or nickel — can snowball in a world still struggling to recover from the pandemic.
“You have to look at the backdrop against which this is coming,” said Gregory Daco, chief economist for EY-Parthenon. “There is high inflation, strained supply chains and uncertainty about what central banks are going to do and how insistent price rises are.”
at 7.5 percent in January, and is expected to start raising interest rates next month. Higher energy prices set off by a conflict in Europe may be transitory but they could feed worries about a wage-price spiral.
“We could see a new burst of inflation,” said Christopher Miller, a visiting fellow at the American Enterprise Institute and an assistant professor at Tufts University.
Also fueling inflation fears are possible shortages of essential metals like palladium, aluminum and nickel, creating another disruption to global supply chains already suffering from the pandemic, trucker blockades in Canada and shortages of semiconductors.
The price of palladium, for example, used in automotive exhaust systems, mobile phones and even dental fillings, has soared in recent weeks because of fears that Russia, the world’s largest exporter of the metal, could be cut off from global markets. The price of nickel, used to make steel and electric car batteries, has also been jumping.
Understand How the Ukraine Crisis Developed
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Failed diplomatic efforts. The United States, NATO and Russia have been engaged in a whirlwind of diplomacy to prevent an escalation of the conflict. In December, Russia put forth a set of demands, including a guarantee that Ukraine would never join NATO. The West dismissed those demands and threatened economic consequences.
It’s too early to gauge the precise impact of an armed conflict, said Lars Stenqvist, the chief technology officer of Volvo, the Swedish truck maker. But he added, “It is a very, very serious thing.”
“We have a number of scenarios on the table and we are following the developments of the situation day by day,” Mr. Stenqvist said Monday.
The West has taken steps to blunt the impact on Europe if Mr. Putin decides to retaliate. The United States has ramped up delivery of liquefied natural gas and asked other suppliers like Qatar to do the same.
negotiations to revive a deal to curb Iran’s nuclear program. Iran, which is estimated to have as many as 80 million barrels of oil in storage, has been locked out of much of the world’s markets since 2018, when President Donald J. Trump withdrew from the nuclear accord and reimposed sanctions.
Some of the sanctions against Russia that the Biden administration is considering, such as cutting off access to the system of international payments known as SWIFT or blocking companies from selling anything to Russia that contains American-made components, would hurt anyone who does business with Russia. But across the board, the United States is much less vulnerable than the European Union, which is Russia’s largest trading partner.
Americans, as Mr. Biden has already warned, are likely to see higher gasoline prices. But because the United States is itself a large producer of natural gas, those price increases are not nearly as steep and as broad as elsewhere. And Europe has many more links to Russia and engages in more financial transactions — including paying for the Russian gas.
Oil companies like Shell and Total have joint ventures in Russia, while BP boasts that it “is one of the biggest foreign investors in Russia,” with ties to the Russian oil company Rosneft. Airbus, the European aviation giant, gets titanium from Russia. And European banks, particularly those in Germany, France and Italy, have lent billions of dollars to Russian borrowers.
“Severe sanctions that hurt Russia painfully and comprehensively have potential to do huge damage to European customers,” said Adam Tooze, director of the European Institute at Columbia University.
Depending on what happens, the most significant effects on the global economy may manifest themselves only over the long run.
economic ties to China. The two nations recently negotiated a 30-year contract for Russia to supply gas to China through a new pipeline.
“Russia is likely to pivot all energy and commodity exports to China,” said Carl Weinberg, chief economist at High Frequency Economics.
The crisis is also contributing to a reassessment of the global economy’s structure and concerns about self-sufficiency. The pandemic has already highlighted the downsides of far-flung supply chains that rely on lean production.
Now Europe’s dependence on Russian gas is spurring discussions about expanding energy sources, which could further sideline Russia’s presence in the global economy.
“In the longer term, it’s going to push Europe to diversify,” said Jeffrey Schott, a senior fellow working on international trade policy at the Peterson Institute for International Economics. As for Russia, the real cost “would be corrosive over time and really making it much more difficult to do business with Russian entities and deterring investment.”
The price increases bedeviling consumers, businesses and policymakers worldwide have prompted a heated debate in Washington about how much of today’s rapid inflation is a result of policy choices in the United States and how much stems from global factors tied to the pandemic, like snarled supply chains.
At a moment when stubbornly rapid price gains are weighing on consumer confidence and creating a political liability for President Biden, White House officials have repeatedly blamed international forces for high inflation, including factory shutdowns in Asia and overtaxed shipping routes that are causing shortages and pushing up prices everywhere. The officials increasingly cite high inflation in places including the euro area, where prices are climbing at the fastest pace on record, as a sign that the world is experiencing a shared moment of price pain, deflecting the blame away from U.S. policy.
But a chorus of economists point to government policies as a big part of the reason U.S. inflation is at a 40-year high. While they agree that prices are rising as a result of shutdowns and supply chain woes, they say that America’s decision to flood the economy with stimulus money helped to send consumer spending into overdrive, exacerbating those global trends.
The world’s trade machine is producing, shipping and delivering more goods to American consumers than it ever has, as people flush with cash buy couches, cars and home office equipment, but supply chains just haven’t been able to keep up with that supercharged demand.
by 7 percent in the year through December, its fastest pace since 1982. But in recent months, it has also moved up sharply across many countries, a fact administration officials have emphasized.
“The inflation has everything to do with the supply chain,” President Biden said during a news conference on Wednesday. “While there are differences country by country, this is a global phenomenon and driven by these global issues,” Jen Psaki, the White House press secretary, said after the latest inflation data were released.
the euro area. Data released in the United Kingdom and in Canada on Wednesday showed prices accelerating at their fastest rate in 30 years in both countries. Inflation in the eurozone, which is measured differently from how the U.S. calculates it, climbed to an annual rate of 5 percent in December, according to an initial estimate by the European Union statistics office.
“The U.S. is hardly an island amidst this storm of supply disruptions and rising demand, especially for goods and commodities,” said Eswar Prasad, a professor of trade policy at Cornell University and a senior fellow at the Brookings Institution.
But some economists point out that even as inflation proves pervasive around the globe, it has been more pronounced in America than elsewhere.
“The United States has had much more inflation than almost any other advanced economy in the world,” said Jason Furman, an economist at Harvard University and former Obama administration economic adviser, who used comparable methodologies to look across areas and concluded that U.S. price increases have been consistently faster.
The difference, he said, comes because “the United States’ stimulus is in a category of its own.”
White House officials have argued that differences in “core” inflation — which excludes food and fuel — have been small between the United States and other major economies over the past six months. And the gaps all but disappear if you strip out car prices, which are up sharply and have a bigger impact in the United States, where consumers buy more automobiles. (Mr. Furman argued that people who didn’t buy cars would have spent their money on something else and that simply eliminating them from the U.S. consumption basket is not fair.)
Administration officials have also noted that the United States has seen a robust rebound in economic growth. The International Monetary Fund said in October that it expected U.S. output to climb by 6 percent in 2021 and 5.2 percent in 2022, compared with 5 percent growth last year in the euro area and 4.3 percent growth projected for this year.
“To the extent that we got more heat, we got a lot more growth for it,” said Jared Bernstein, a member of the White House Council of Economic Advisers.
$5 trillion in spending in 2020 and 2021. That outstripped the response in other major economies as a share of the nation’s output, according to data compiled by the International Monetary Fund.
Many economists supported protecting workers and businesses early in the pandemic, but some took issue with the size of the $1.9 trillion package last March under the Biden administration. They argued that sending households another round of stimulus, including $1,400 checks, further fueled demand when the economy was already healing.
Consumer spending seemed to react: Retail sales, for instance, jumped after the checks went out.
loss of purchasing power over time, meaning your dollar will not go as far tomorrow as it did today. It is typically expressed as the annual change in prices for everyday goods and services such as food, furniture, apparel, transportation costs and toys.
What causes inflation? It can be the result of rising consumer demand. But inflation can also rise and fall based on developments that have little to do with economic conditions, such as limited oil production and supply chain problems.
Is inflation bad? It depends on the circumstances. Fast price increases spell trouble, but moderate price gains could also lead to higher wages and job growth.
Can inflation affect the stock market? Rapid inflation typically spells trouble for stocks. Financial assets in general have historically fared badly during inflation booms, while tangible assets like houses have held their value better.
Americans found themselves with a lot of money in the bank, and as they spent that money on goods, demand collided with a global supply chain that was too fragile to catch up.
Virus outbreaks shut down factories, ports faced backlogs and a dearth of truckers roiled transit routes. Americans still managed to buy more goods than ever before in 2021, and foreign factories sent a record sum of products to U.S. shops and doorsteps. But all that shopping wasn’t enough to satisfy consumer demand.
stop spending at the start of the pandemic helped to swell savings stockpiles.
And the Federal Reserve’s interest rates are at rock bottom, which has bolstered demand for big purchases made on credit, from houses and cars to business investments like machinery and computers. Families have been taking on more housing and auto debt, data from the Federal Reserve Bank of New York shows, helping to pump up those sectors.
But if stimulus-driven demand is fueling inflation, the diagnosis could come with a silver lining. It may be easier to temper consumer spending than to rapidly reorient tangled supply lines.
People may naturally begin to buy less as government help fades. Spending could shift away from goods and back toward services if the pandemic abates. And the Fed’s policies work on demand — not supply.
LONDON — Few things are more likely to set teeth on edge in Downing Street than the tentative winner of an inconclusive German election declaring that Brexit is the reason Britons are lining up at gas stations like it’s 1974.
But there was Olaf Scholz, the leader of the Social Democratic Party, telling reporters on Monday that the freedom of movement guaranteed by the European Union would have alleviated the shortage of truck drivers in Britain that is preventing oil companies from supplying gas stations across the country.
“We worked very hard to convince the British not to leave the union,” Mr. Scholz said, when asked about the crisis in Britain. “Now they decided different, and I hope they will manage the problems coming from that.”
For ordinary people, Mr. Scholz’s critique might also seem like old news. Britain is no longer debating Brexit. Nearly everyone is exhausted by the issue and the country, like the rest of the world, has instead been consumed by the pandemic.
began to run out of gasoline, sparking a panic and serpentine lines of motorists looking for a fill up.
While it would be wrong to blame a crisis with global ramifications solely on Brexit, there are Brexit-specific causes that are indisputable: Of the estimated shortfall of 100,000 truck drivers, about 20,000 are non-British drivers who left the country during the pandemic and have not returned in part because of more stringent, post-Brexit visa requirements to work in the country, which took effect this year.
reversed course last weekend and offered 5,000 three-month visas to foreign drivers to try to replenish the ranks (while also putting military drivers on standby to drive fuel trucks, a move he hasn’t yet taken.)
“You have business models based on your ability to hire workers from other countries,” said David Henig, an expert on trade policy for the European Center for International Political Economy, a research institute. “You’ve suddenly reduced your labor market down to an eighth of the size it previously was. There’s a Brexit effect on business models that simply haven’t had time to adjust.”
after Britain’s successful rollout of coronavirus vaccines. Some attributed the government’s ability to secure vaccines and obtain swift approval of them to its independence from the bureaucracy in Brussels.
party’s leaders have failed to find their voices. It is reminiscent of earlier debates, where the party’s deep divisions on Brexit hampered its ability to confront the government.
“I’ve been amazed by the reluctance of Labour to go after them,” said Anand Menon, a professor of European politics at Kings College London. “You can allude to Brexit without saying Brexit. You can say it’s because of the Tories’ rubbish trade deal.”