Picvalue Corp`s piece on Global growth prospects weaken significantly amid the Ukraine war
The World Economic Situation and Outlook for mid-2022 warn that the global economy may be on the cusp of a new crisis while recovering from the pandemic. The Ukrainian war has upended a fragile global recovery, unleashed a devastating humanitarian crisis in Europe, pushed up food and commodity prices, slowed worldwide growth, and exacerbated global inflationary pressures. Geopolitical and economic uncertainty undermines business confidence and investment, weakening the short-term economic outlook.
Global growth prospects weaken significantly amid the Ukraine war
The World Economic Situation and Outlook for mid-2022 warn that the global economy may be on the cusp of a new crisis while recovering from the pandemic.
Against this backdrop, the world economy is now projected to grow by just 3.1% in 2022 and 2023 (Figure 1), a sharp downward revision of 0.9 and 0.4 percentage points, respectively, from our previous forecast published in January 2022. Our baseline Ukraine war has intensified further, the outlook faces significant downside risks, and downgrades to the growth outlook are broad-based. U.S. economic growth is forecast to slow to 2.6% in 2022 as high inflation pressures, aggressive monetary tightening by the Federal Reserve and a stronger dollar weigh on net exports. In China, GDP is forecast to grow by 4.5%, a 0.7 percentage point downward revision, with strict zero-COVID-19 policies adversely affecting growth prospects. Meanwhile, the EU’s economy has been hit exceptionally hard: its GDP is forecast to expand by 2.7% in 2022, 1.2 percentage points lower than expected in January.
The economic outlook for the Commonwealth of the Independent States and Georgia was also revised sharply. The economy of the Russian Federation is expected to contract by about 10% in 2022. The Ukrainian economy is expected to contract by 30% to 50% in 2022 amid massive damage to infrastructure, population displacement, and disruption to economic activity.
The outlook for developing countries has also deteriorated, with GDP forecast to expand by 4.1% in 2022, 0.4 percentage points lower than the January forecast. Rising energy and food prices, rising inflationary pressures, and slowing growth in the US, EU, and China are denting their growth prospects. Tighter monetary policy in the United States will substantially increase its borrowing costs. An increasing number of developing countries — including several least developed countries — face stagnant growth prospects and growing risks to sustainable development, while debt problems are severe. The negative outlook is exacerbated by worsening food insecurity, especially in Africa and West Asia. In addition, lower vaccination rates make developing countries more vulnerable to a new wave of COVID-19 infections.
The war in Ukraine and sanctions on the Russian Federation have disrupted commodity markets, exacerbating the supply-side shock. After a strong rebound in 2021, global trade growth is expected to moderate significantly in 2022. The conflict has directly disrupted exports of crude oil, natural gas, grains, fertilizers, and metals, driving up energy, food, and commodity prices (Figure 2). The Russian Federation and Ukraine are major suppliers of agricultural products, accounting for 25 percent of global wheat exports, 16 percent of maize exports, and 56 percent of sunflower oil exports.
The world economy is facing huge inflationary pressures. Global inflation is expected to rise to 6.7% in 2022, double the 2.9% average in 2010-2020 (Figure 3). Headline inflation in the U.S. has reached its highest level in four years. Among developing regions, inflation is rising in West Asia and Latin America, and the Caribbean. Soaring food and energy prices have had a knock-on effect on the rest of the economy, which is also reflected in a notable rise in core inflation in many economies.
Rising inflation poses an additional challenge to an inclusive recovery, as it disproportionately affects low-income households, which spend most of their income on food. The decline in real incomes has been especially pronounced in developing countries, where poverty is more prevalent, wage growth remains constrained, and fiscal support measures to mitigate the impact of rising oil and food prices on vulnerable groups are more limited. As developing countries still grapple with the economic shock of the pandemic, soaring food inflation is fueling food insecurity and pushing many below the poverty line.
The impact of the Ukraine war on global climate action
The outbreak of the Ukraine war comes as global CO emissions hit a record high, resuming an upward trend after a temporary dip in the first half of 2020 in response to the COVID-19 pandemic. Total greenhouse gas (GHG) emissions in 2019 reached approximately 59 gigatonnes of carbon dioxide equivalent (GtCO2-eq) units. The remaining carbon budget, consistent with a 50% probability of limiting global warming to 1.50 C, has been assessed at 500 GtCO2-eq units, making short-term increases in emissions even more problematic. For example, emissions may increase if coal is a net replacement for natural gas (a relatively clean fossil fuel) in energy production; if rising food prices prompt a reduction in the use of biofuels or land clearing to increase agricultural production; or if generally There has been a substantial increase in military spending associated with a large greenhouse gas footprint.
In the medium to long term, the outlook for greenhouse gas emissions will depend on several factors. Continued price increases in energy markets could accelerate the adoption of renewables and more efficient alternatives, but could also incentivize oil and gas companies to seek to maximize profits and invest more in fossil fuels, leading to more stranded assets. On the other hand, rising battery production costs or supply chain issues could dampen demand for EVs.
The Ukraine war is reshaping the global energy landscape
The war in Ukraine and broad economic sanctions on the Russian Federation are expected to fundamentally reshape the global energy landscape. The conflict has disrupted global energy markets and brought energy security to the forefront. Governments around the world have taken steps to protect households and businesses from rising energy prices. In addition to direct income support for low-income households, the measures include cuts to VAT on energy consumption, energy price caps, fuel rebates, and cost subsidies. For example, Germany, France, Italy, and Spain announced energy support measures worth a total of 80 billion euros. Artificially low energy prices distort the incentive for households and businesses to consume less energy. also,
In response to rising prices, many countries are looking to expand domestic energy supplies. In the short term, these efforts could lead to an increase in fossil fuel production. In the United States, the world's largest oil and gas producer, higher prices and growing energy security concerns have prompted increased drilling activity. The number of U.S. rigs, which measure the number of active oil wells, rose 58% in mid-April from a year earlier. Meanwhile, the U.S. government announced it will release 1 million barrels per day of crude oil from its Strategic Petroleum Reserve over the next six months in a bid to lower energy prices.
In Europe, geopolitics and energy security issues have risen to the top of the political agenda as energy prices have soared. The war has caused many governments to reconsider their energy policies and energy dependence on the Russian Federation. In 2020, the Russian Federation accounted for approximately 41% of EU gas imports, 37% of oil imports, and 19% of hard coal imports (Figure 4). For Germany, which plans to completely phase out nuclear power by the end of 2022, Russian gas accounted for 65% of total gas imports in 2020. If nothing else is arranged, an immediate cut in gas supplies to the Russian Federation would have severe repercussions, potentially triggering a deep recession in countries such as Germany.
A move to eliminate or reduce Russian gas imports would mean scrambling for alternatives to minimize economic disruption. In the medium term, the EU may turn to other energy exporters. However, this will require the EU to quickly address infrastructure bottlenecks in pipelines, storage terminals, and tankers. Natural gas is the least polluting of all fossil fuels, and its imports can also be partially replaced by oil and coal. In Europe, there has also been a renewed interest in nuclear power as a way to reduce reliance on Russian oil and gas. The Russian Federation is also likely to find new fossil fuel markets in East and South Asia, where its oil and gas exports could replace coal, the dirtiest fossil fuel. In East and South Asia, coal continues to play a dominant role in the energy mix.
High energy prices are also likely to spur investment in renewable energy and energy efficiency, potentially supporting a shift away from fossil fuels. In many countries, solar energy has become the cheapest form of new electricity. According to a recent report, 62% of total renewable power generation added in 2020 costs less than the cheapest new fossil fuel option. The unit cost of onshore and offshore wind and other renewable energy sources such as concentrated solar is also lower than the cost of fossil fuels. However, earlier high fossil fuel prices also led major oil and gas producers to increase investment in fossil fuel infrastructure. A similar response at this point—including short-term policy measures—could lock the world into a high-carbon future.
Challenges to vehicle electrification from potential mineral shortages
The Ukraine war has also shaken global metals markets (Figure 5), with a potential knock-on effect on renewable energy prices. For example, an average electric car battery contains about 80 pounds of nickel. Nickel prices are up about 50% compared to last year, as the Russian Federation processes 20% of the world's high-grade nickel. High nickel prices could also have a detrimental impact on the environment, as the prospect of higher profits could encourage additional nickel production through polluting and environmentally damaging surface mining, including from tropical rainforests in Indonesia and the Philippines. Overall, the price of a basket of electric vehicle battery metals rose 64% compared to last year, which could raise the final price of electric vehicles by as much as $2,000 and slow down EV sales.
The net impact of conflict on clean energy products will largely depend on how manufacturers ensure supplies of critical minerals, invest in new processing plants, and recycle battery materials. To ensure access to critical minerals, the 31 member countries of the International Energy Agency (IEA) launched a critical minerals security plan in March 2022, which could include the storage of metals needed for electric vehicles and other renewable energy infrastructure, similar to in the strategic oil inventories of IEA members.
Rising food prices challenge climate action
Sustainable biofuels (ethanol, biodiesel, and renewable diesel) are important fossil fuel alternatives for land transport and are critical to achieving net zero emissions. Globally, 13% of corn production and 20% of sugarcane production are used for ethanol production, while 11% of global vegetable oil production is used for biodiesel. The war has pushed up food prices, especially for commodities such as wheat, corn, and vegetable oil, for which the Russian Federation and Ukraine are major producers and exporters.
Growing food and energy security concerns have raised questions about the use of food crops as biofuels. For example, Croatia, Finland, and Sweden have recently relaxed biofuel blending requirements to reduce energy price pressures. The U.S. government, on the other hand, is examining whether abandoning the biofuel blending mandate could help offset soaring grain prices while extending the availability of higher biofuel blend gasoline during the summer to curb high fuel costs. If the use of biofuels declines during the current period of high food prices, the carbon intensity of land transport could increase substantially. In the EU, a 0.4 percentage point reduction in biofuel use could lead to a 0.6 percent increase in the emissions intensity of road transport fuels.
Higher food prices may also lead to the intensification of agricultural practices and the expansion of agriculture to fallow or forested lands. In March, for example, European officials agreed to let farmers grow food and sow crops on fallow fields. As land-use change is a significant contributor to greenhouse gas emissions (about 10% of total emissions in 2019), impacts such as these are likely to be further captured from shrinking carbon budgets.
National and global support for climate action
Expectations that G20 stimulus spending during the COVID-19 pandemic would support mitigation efforts and help reduce emissions did not materialize. Only about 6 percent of total stimulus spending goes to reducing emissions, including electric vehicles, building energy efficiency, and installing renewable energy. In the face of the conflict in Ukraine, energy and food security issues dominate policy discourse and climate change challenges take a back seat. However, time is running out for the world to avoid catastrophic global warming, the UN's Intergovernmental Panel on Climate Change (IPCC) sixth assessment report highlights.
While climate action may face obstacles in the short term, scaling up efforts to achieve the Paris Agreement on climate change and the 2030 Agenda for Sustainable Development remains critical. Recognizing the link between energy decarbonization and energy and national security can provide a greater political and stakeholder push for energy decarbonization. Meanwhile, the conflict in Ukraine has highlighted the complex relationship between energy and food security, climate change, and sustainable development. This crisis presents a new and unique opportunity to address these complexities through appropriate policies, targeted investments, policies, and international cooperation to accelerate the transition to sustainable development while minimizing its cost.
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