The Russia-Ukraine conflict began on the morning of February 24, 2021, causing a significant shock to the global economy, particularly impacting energy and food markets, constricting supply, and driving prices to unprecedented levels. The euro area has been particularly susceptible to the economic repercussions of the conflict due to its heavy reliance on energy imports, which accounted for over half of its energy consumption in 2020. Additionally, Russia was a key energy supplier to the euro area before the war, and both Russia and Ukraine were significant contributors to euro area imports of food and fertilizers. The euro area’s status as a highly open economy renders it vulnerable to disruptions in global markets and value chains.
Inflationary pressures in the euro area were exacerbated by the conflict, further increasing consumer prices, particularly for energy and food. Headline inflation rose from 0.3% in 2020 to 2.6% in 2021 and then to 8.4% in 2022, with energy and food inflation accounting for over two-thirds of the record-high inflation in 2022.
Pandemic Economic Recovery Slowed
Prior to the invasion, global economic growth projections for 2022 were around 5%. However, the conflict in Ukraine caused a “massive and historic energy shock” to the markets, as described by a November 2022 OECD report. This shock was a primary factor in slowing economic growth to 3.1% in 2022 and the OECD’s projection of a further slowdown to 2.2% in 2023. Europe’s economy has been most affected, with growth in 2023 expected to be a mere 0.3%.
Price Increases and Supply Chain Disruptions Necessitate Realignment
The outbreak of war and subsequent sanctions disrupted not only direct supply chains with Russia and Ukraine but also those through Russia to Asia. Consequently, prices for many raw materials, energy, intermediate products, and transportation services have risen sharply. Fuel prices have doubled, and gas prices have tripled, with further increases anticipated in the medium term.
Companies are now compelled to identify potential savings and prioritize digitization projects. Mattias Schmelzer, CMO at KPMG in Germany, states that “the supply bottlenecks and rising purchase prices affect almost every industry and company due to multi-level supply chains,” which have even more severe consequences than the direct impacts of the war for companies operating in Russia and Ukraine.
Commodity prices futures: pre- and during conflict expectations (Index: 100 = spot price as of March 28)
Since the war began, the Biden administration and the U.S. Congress have directed more than $75 billion in assistance to Ukraine, which includes humanitarian, financial, and military support, according to the Kiel Institute for the World Economy, a German research institute. EU countries have supplied the largest amount of financial assistance also.
However, some European governments, such as Latvia and Estonia, are making larger financial contributions to Ukraine relative to the size of their own economies.
Source: Antezza et al., Ukraine Support Tracker, Kiel Institute for the World Economy.