Global | Economic consequences of the war in Ukraine

Bearing in mind the enormous uncertainties that exist, rather than give forecasts, it makes more sense to simulate the impacts of various possible scenarios in relation to energy and other commodity prices, and of pressures on financial markets, and to assess the sensitivity of GDP growth and inflation through them.

Key points

• Key points:
• The effects of this conflict go beyond the borders of Ukraine and Russia and will operate simultaneously though three channels. The first is financial. The exposure, both direct and indirect, of the international financial system and foreign firms to the Russian economy, and the interconnection of many financial institutions to assets and liabilities subject to sanctions, is a cause for concern.
• The second channel is that of confidence. Stock market prices have dropped, the risk premiums of many assets have increased while the yields of those which provide the safest haven have fallen. At the same time, capital flight has been seen in certain markets, and the dollar has appreciated against the euro.
• The third channel is the rise in the price of energy—especially gas—and other commodity prices, triggering a major supply-side shock, which increases inflation and reduces GDP growth. These factors could see households and firms delay consumption and investment decisions.
• Even if energy prices only end up increasing by 20% of their projected level, this could easily mean a loss of more than one point of eurozone GDP growth in 2022 — which BBVA Research forecast at 3.7% before the start of the war.
• Energy and unprocessed foods have a weight in CPI of 16.4% in the EU and 19.8% in Spain. A rise in consumer prices of these two components—assuming they finally stabilize around 20%—would add an additional 3pp to inflation during 2022.

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