The economic cost of Russia-Ukraine war and China lockdown

Published on July 14, 2022 by?Prachi Murarka

Recent events in the world have had geopolitical ramifications and effected high economic instability globally. The world economy is currently battling inflation, lower GDP growth and supply chain disruption. In April 2022, the IMF revised downward its January 2022 projection for 2022 world GDP growth by 1.3ppt (from 4.9% to 3.6%), factoring in the ongoing?Russia-Ukraine conflict.

How severe is the impact of these individual events and what could be the possible future outcome?

Impact and future outcome of Russia-Ukraine war

Russia invaded Ukraine again in February 2022, creating political and economic unrest worldwide. As the world was steadily limping back to normalcy following the blow from the COVID-19 pandemic and China lockdown, the start of the Russia-Ukraine war jolted the economy, with inflation touching a lifetime high in major economies, due to supply-demand imbalance. The majority of the economies have supported Ukraine, imposing sanctions on Russia, thereby crimping the country’s access to foreign capital, which will likely pressure its GDP.

Impact

• Accelerating inflation – Russia exports oil and gas, metals including iron and steel, and cereals, with the largest beneficiaries being Europe, the UK, China, South Korea and the US. Ukraine exports cereals (predominately corn, wheat and seed oils), semi-finished iron, iron ore and insulated wires (largely to China, Europe, Russia, Turkey, India, Egypt and the US). The war has translated into restrictions on trade with Russia and Ukraine, inflating the price of these commodities. Energy, food grains and metals have been the biggest casualties in this context.
• Declining GDP growth – Trade restrictions and sanctions imposed on Russia because of the war have hurt the GDP growth of countries exporting to Russia. Furthermore, restricted imports from Russia has led to the unavailability of certain commodities, negatively impacting the country’s manufacturing capabilities.

Future outcome

• Elevated inflation and declining GDP growth are expected to persist through 2022 before easing marginally in 2023.
• Countries are expected to import from other nations (e.g., oil and gas from the Middle East and food grains from Asia).
• Escalating food inflation has spawned food insecurity in low-income nations including the Sub-Saharan Africa. If the conflict stretches, countries that import food grains from Russia and Ukraine may experience a shortfall (e.g., African nations, ASEAN 5 and the Middle East).
• The price of metals, especially iron, has ratcheted up considerably as a result of the war, as it has forced the suspension of operations of steel plants in Russia and Ukraine. Prices of iron ore and semi-finished iron have also shot up, as they are in short supply. This will likely impact the economies that import them from the two countries. Also, the price of products using these commodities as input, such as automobiles, construction materials and infrastructure goods, will likely rise.

Impact and future outcome of China lockdown

China was the largest exporter in 2010 and the largest trading nation in 2013. Chinese exports largely land up in the US, Hong Kong, Japan, South Korea, Vietnam and Germany. Integrated circuits, computers,?broadcasting equipment?and?office machine parts are its biggest exports.

Implementing its zero-COVID policy, China imposed cross-country lockdown, pulling the brakes on manufacturing and transportation. Inter-provincial travel restrictions have sparked off a severe shortage in truck drivers, culminating in slow offloading of cargo and, hence, backlog at major Chinese ports.

Impact

• Supply chain disruption?– The lockdown has led to substantial business and operational disruptions, limiting the number of logistics suppliers and workers. The amount of time spent by truckers on the road fell 70% in April 2022 from March 2022. Lockdown in Shanghai and other major ports of China has disrupted the global supply chain. The main issue is seen at the port in Shanghai, home to the busiest container port globally and China’s financial hub. It makes up around one-fifth of China’s port volume. The major effects of congestion at Shanghai port are as follows:
• In March 2022, the volume of goods shipped by sea from Shanghai?dropped 26% between March 12, 2022 and April 4, 2022.
• Between 12 March 2022 and 4 April 2022, the volume of goods leaving the Shanghai ports by trucks contracted 19%.

Future outcome

• As the lockdown in China is lifted and restrictions eased, the congestion at Chinese ports will likely subside. However, it will likely lead to a huge outflow of containers into the ports of the US and Europe, clogging them.
• The world relies heavily on China for manufacturing. Given the recent events and the aftermath of supply chain bottlenecks due to the lockdown in China, many companies are mulling moving their manufacturing units completely or partially from China.
• The congestion at ports has also been guilty of inflating prices, as it has pushed freight cost higher. Freight cost for a single container from China to the US edged up from USD 5,900 last year to USD 15,800 this year.
• The impact of the lockdown and restrictions is likely to be felt throughout 2022, as it will likely take several months to normalise port operations and bring it to pre-lockdown levels.

Conclusion

Owing to the pent-up demand fuelled by the COVID-19-pandemic, manufacturing units resumed operations, while trade experienced a revival. The increase in demand led to high inflation across economies. Just as the inflated demand settled, GDP growth projections for 2022 and 2023 shrank.

The environment, marked by high inflation and lower GDP growth, was exacerbated by Russia’s invasion of Ukraine in February 2022. As the war stirred geopolitical unrest, trade restrictions were imposed on Russia. Many economies, including the US and the UK, slapped sanctions on Russia, curbing its ability to seek foreign funds. All these factors led to a 1.3% decline in the 2022 GDP growth forecast.

Starting February 2022, the world witnessed atypical price hike on top of a significant price rise in 2021, especially in commodities that Russia and Ukraine sell in large volumes – energy, fertilisers, food grain and metals, among others.

China’s zero-COVID policy shuttered manufacturing units and transportation systems in its major provinces, especially the Shanghai port. With truck drivers and staff in short supply, major ports in China began to see congestion. One in every five container ships was waiting outside Chinese ports. The average waiting period at Chinese ports increased 3x between 28 March 2022 and 15 April 2022.

While there is a question mark on the future and the duration of the Russia-Ukraine war, China is highly unlikely to significantly relax its lockdown policy before end-2022. Hence, inflation and supply chain disruption are expected to ease only by early 2023.

How Acuity Knowledge Partners can help

Supply chain disruptions coupled with an uncertain business environment has put several businesses at risk. However, the scenario has also presented an opportunity for businesses to transition to a more diversified and robust supply chain model.?Acuity Knowledge Partners (Acuity)?helps analyse potential risk and opportunities (business, financial as well as market) arising from the evolving geopolitical events, available alternatives to mitigate them and pathways to tap new opportunities through its strategic support and advisory services. Acuity offers its expertise in energy, metal and mining, manufacturing, electric vehicles,?environmental social and governance (ESG), supply chain and sustainability as well as in-depth market research capabilities across the value chain, helping companies achieve their business objectives.

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