Ukraine war intensifies risks to global economy, says Moody’s AnalyticsIn yet another downbeat outlook for global supply chains, the Russia-Ukraine war has increased the prospect of sustained high commodity prices and has overtaken the pandemic-led disruptions creating global economic uncertainties, said Moody’s Analytics.”Global supply chains have been in a fragile state since the start of the pandemic, and the Russia-Ukraine military conflict will only exacerbate the situation for companies in many industries, particularly those heavily reliant on energy resources,” said Tim Uy, an associate director at Moody’s Analytics.Crude oil prices rebounded early on Friday after sliding during a volatile previous session, having initially soared to multi-decade highs on Thursday as the escalation in the Russia-Ukraine war raised concerns of runaway inflation.Oil markets were volatile on supply disruptions due to the sanctions on Russia in the previous session, with Russian exports at 4 to 5 million barrels per day more than any other nation other than Saudi Arabia. The international benchmark for oil – Brent crude futures, rose to within 16 cents of $120 a barrel – highest since 2012, before falling to settle at around $110, on hopes the United States and Iran will agree soon to a nuclear deal that could add output to a badly undersupplied market.But Brent crude oil futures rebounded to gain over 1.5 per cent to $112 early on Thursday as supply concerns still and on expectations Russia’s war in Ukraine could hit the global economy from higher prices to dampened spending and investment.”The greatest risk facing global supply chains has shifted from the pandemic to the Russia-Ukraine military conflict and the geopolitical and economic uncertainties it has created,” said Moody’s Analytics’ Mr Uy.”The uncertainty over the conflict will lead to higher oil and natural gas prices worldwide, even if additional supply outside of Russia comes on line. Inventory and reserves can help mitigate short-term supply-chain disruptions, but shortages will be inevitable should the conflict persist,” he added.Expectations are that an Iran deal would not replace Russia’s disruptions, and the direct impact will be more significant on European countries.”While the world will be relieved to have seemingly overcome the Omicron variant, a new challenge has emerged where the endgame is not clear. The ever-changing nature of the sanctions (on Russia) being imposed and the fluid nature of what is happening on the ground only add to the uncertainty clouding the horizon,” noted Mr Uy.”What is clear is that this conflict will certainly feed into the increasingly inflationary environment most countries find themselves in. This, in turn, is likely to lead to central bank tightening, higher interest rates, and slower growth. In this sense, the conflict will have broader implications than may first appear; not only is it leading countries to reconsider their strategy for energy security and supply-chain resilience, it is also adverselyimpacting companies and consumers with no direct links to the situation via higher prices and interest rates,” he added.Tracking the continued drag on expectations of European economic growth from higher commodity prices driven by the Ukraine war, the euro was set for its worst week versus the dollar in nearly two years.”In terms of evaluating country risk, the most salient adverse impact will be felt in countries primarily in Europe that are recipients of Russian oil and natural gas. The most salient adverse impact will be felt in countries primarily in Europe that are recipients of Russian oil and natural gas,” said Mr Uy.”The effects of surging energy and gas prices could undermine the industrial and private consumption rebound that had been expected following the easing of COVID-19 restrictions,” he added.The European common currency fell to as low as $1.1008 in early Asia trade, its weakest since May 2020, following news Ukraine’s nuclear power plant, the largest of its kind in Europe, was on fire after an attack by Russian troops.It recovered a little to $1.103 after Ukrainian and overseas officials said there was no indication of elevated radiation levels at the plant but were still down 0.34 per cent on the day and 2.1 per cent this week, its worst week since March 2020.The euro is also at its lowest in nearly four years against the Aussie dollar and hit its weakest levels since July 2016 versus sterling.”Europe was mired in an energy crisis even before the Russia-Ukraine military conflict began. Energy prices in Europe significantly diverged from oil prices in the rest of the world last year partly due to the distribution network in Europe and overreliance on a few key suppliers. Russia holds 12 per cent of the world’s oil supply and 17 per cent of its natural gas. It is also a key supplier of palladium and wheat, and along with Ukraine has most of the world’s neon supply,” said Mood’s Analytics’ Mr Uy.But the risk is not restricted only to Europe. The contagion will be more devastating for the global economy in this closely connected world, which is just about recovering from the pandemic-led deep recessions in many countries.”The weight of the economic impact the Russia-Ukraine military conflict will have on global supply chains will hinge on how long the conflict lasts – inventory and reserves can help mitigate short-term supply-chain disruptions, but shortages will be inevitable should the conflict persist,” he added.
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