As pandemic restrictions have eased, demand has rocketed and supply has struggled to keep up. The war in Ukraine has accentuated these pressures. Inflation was already rising well above targets and the world had begun to re-examine its reliance on global supply chains that can easily be interrupted. Now energy and food security have become a major policy focus. Whether and how these issues are resolved will impact on the global economy for years to come.
The International Monetary Fund, which downgraded its main world growth forecast from 4.4 per cent to 3.6 per cent in 2022 and from 3.8 per cent to 3.6 per cent for next year, stressed that because of the war higher inflation would persist for longer. For the advanced economies, inflation is forecast at 5.7 per cent for 2022, falling to 2.5 per cent in 2023. For emerging markets it is likely to be worse—at 8.7 and 6.5 per cent respectively. The IMF also estimated that, should there be an oil and gas blockage as a result of the EU imposing extra sanctions by mid-2022, global inflation would be some 1 per cent higher and the Eurozone would see a 3 per cent hit to GDP, compared to the baseline. The slower world growth that would follow would then dampen inflation from 2024 onwards, but gas prices in Europe would still be some 20 per cent higher than in the baseline forecast.
How likely is that second scenario? The tone of the EU seems to be toughening up despite differences between member states, notably resistance to an early embargo by Germany. Even Germany is now moving towards banning Russian oil by the end of the year, with gas said to follow. Academics and others are doing helpful work on how to make any embargo clear the legal hurdles and work in practice. But it will all be brutal in the short term. Even on the baseline scenario, with current policies being sustained, Germany and Italy are the two G7 countries facing the biggest growth downgrades this year.
On the positive side, the release of US strategic oil reserves and the slowdown in China have brought oil prices down from their March peaks. There have also been suggestions, pushed mainly by Italian prime minister Mario Draghi, to combine forces so that EU countries engage in joint gas procurement, enhancing their bargaining power and thus reduce the price the EU pays for its gas imports. Joint stockpiling of gas reserves would also improve energy security. Germany is also finally starting the process of developing Liquefied Natural Gas facilities to be able to receive shipments from other gas-producing regions. At some point, supply and demand will hopefully start to work to stabilise prices and also improve energy security.
This may be more difficult to achieve with food security. Sharply rising freight costs even before the war were creating supply and delivery problems—as were delays at ports, where congestion remains an issue. Since the war, the rise in food prices has accelerated, not just for staples such as wheat and grain and vegetable oils, but also for the inputs that go into the farming process. Pre-war, Russia was accounting for some 15 per cent of global trade in nitrogenous fertilisers and for 17 per cent of global potash fertiliser exports. Much of that is now under threat. Russian commercial vessels are also having increasing difficulty accessing ports in many countries. Meanwhile, Ukrainian transport and export infrastructure is being pummelled by Russian bombing. Higher food prices and shortages are raising political tensions in a number of developing countries. We recently saw destabilising food (and energy) related riots in Sri Lanka and that could easily spread to other parts of the world.
The head of the World Bank, David Malpass, has warned of a humanitarian food catastrophe across the globe, and that some 60 per cent of the world’s poorest countries are facing or could soon face serious debt problems. A new $170bn World Bank crisis response fund for poorer nations should provide some help. But is it going to be enough? Much will depend on how long the crisis lasts.
The World Bank defines food security as “when all people, at all times, have physical and economic access to sufficient, safe and nutritious food that meets their dietary needs and food preferences for an active and. healthy life.”
The emphasis here is “at all times.” The question therefore is how transitory the current crisis is. If supply cannot easily respond to higher prices, if input costs are such that the increased expense of planting crops cannot be passed onto the consumer, or if much arable land has been transferred to other uses, then the supply response will be limited and problems—and unrest—may persist. No wonder, then, that when the World Economic Forum published its Global Risks Report to accompany its virtual Davos annual meeting in January, the experts surveyed put “livelihood crises” and “social cohesion erosion,” two issues that are clearly linked, into their top five long-term risks. And that was before the war.
