The economic consequences of the war

by Rony Hamaui

Russia's invasion of Ukraine is certainly not a world war. Instead, it is a war with undoubted planetary economic and geopolitical consequences, which no other conflict in the last 75 years has provoked. In fact, since the Second World War, no regional clash, from the war in Korea to that in Vietnam, from that in Iraq to that in Syria, has had such a significant impact on world growth, inflation, trade, but also relations. international.    

At an economic level, the revision of growth rates recently made by the IMF in the latest issue of the World Economic Outlook allows us to estimate the loss of world GDP over the next two years at just under a trillion dollars. This will be a quarter suffered by Russia, another quarter by the countries of the European Union, a sixth by the United States and the remainder by the rest of the world. In particular, Italy will see reduced its growth of about 45 billion dollars, equal to two percentage points of GDP. Some strong raw material producing countries, such as Argentina, Brazil, Saudi Arabia, the United Arab Emirates, etc. instead, they will benefit in terms of growth. 

In other words, the the short-term effects of the war on development appear largely asymmetrical and Russia, apart from the controversy over the relative effectiveness of sanctions, will suffer only a small percentage of the costs that the world will have to suffer. Obviously, the losses in relative terms of the GDP of the two belligerents, Ukraine and Russia, will be much higher than those of any other country: respectively of 35% and 16% in two years. 

The war will also have heavy effects in terms of less international trade and higher inflation. Also in this case the effects will be asymmetrical since they will affect developing countries more than advanced ones. The former will see their exports drop by 3.2% in two years and consumer prices by 4.6% increase, the latter by less than half.

If the effects in terms of lower growth are still hard to be felt, those on inflation are already clearly visible. This is because the increase in raw materials was immediately discharged on costs of petrol and diesel, while the effects of lower growth have longer gestation times. Furthermore, the war came at a time of strong economic recovery, if not overheating, which at least in the United States had already triggered a price-wage spiral. Finally, on both sides of the Atlantic, expansionary fiscal policies have not finished exerting their effects, while liquidity still remains abundant as central banks have just begun to tighten the purse strings.      

War will also lead to a increase in public spending both for the rearmament process that it has triggered and for the aid that will have to be provided to the Ukrainian population, to numerous developing countries that will go into crisis and to large sections of the population of advanced countries that will suffer the effects of the higher cost of materials prime. Almost all countries have already granted subsidies for the purchase of gasoline and other raw materials, while the United States has so far allocated a record amount of $ 13.6 billion in aid to Ukraine. 

Recent estimates estimate that the damages suffered by Ukraine amount to 600 billion dollars and that the country needs 5 billion a month in aid to survive. This higher public spending will partly mitigate the recessionary effects described above but, above all, will favor some economic sectors asymmetrically compared to others. Think of armaments, energy, agriculture and the steel industry, just to name a few. 

To these costs materials must be added those humans, caused by thousands of deaths, injuries, people forced to emigrate and stress, which has affected individuals both in countries directly involved and in those indirectly affected by the conflict. Based on some provisional data, a recent work by Dan Ciuriak (“The Economic Consequences of Russia's War on Ukraine”, 29 March 2022), using standard parameters of the statistical value of life, has estimated these costs at no less than six trillion.  

However, what may worry most are the economic consequences of peace, to paraphrase Keynes's famous book written in 1919 after the First World War. After the bloodiest phase of the war, and it is probable that this moment is not too far away because Putin has a strong need to declare victory and cannot exceed in paying the costs, what economic order will come to be established? Some commentators have speculated that: 

1. the world will plunge into a new "cold war", where the Soviet Union will no longer stand beyond the "Iron Curtain" but the Russian-Chinese Union; 
2. globalization will end and a new, more reassuring commercial regionalism will prevail; 
3. the numerous international organizations, born after the Second World War, which in this phase only played a supporting role, will be destined to disappear as well as the G8 / 20; 
4. the theory of secular stagnation, hitherto espoused by a small number of economists, will prevail in a world where the mobility of goods and factors is more reduced and the allocation of resources is less efficient.

At the basis of these hypotheses lies the harshness of the tones used by the American administration, which needed to send clear messages especially to China, as well as a more general feeling of empathy of the Western world to the Ukrainian cause. However, after an initial phase of adjustment, the elements of continuity in the international order could prevail and the adjustments should be less catastrophic than those hypothesized today. After all, history teaches us that often men are willing to quickly forget the horrors of wars, while economic reasons end up prevailing, especially in a world where ideologies have almost completely disappeared. 

Certainly it is possible that the damage of the war will cause the onset of regimes totalitarians, as had happened after the First World War, but that was precisely a world conflict that had left over 15 million dead and 20 million wounded on the ground.

Rony Hamaui he is president of Intesa Sanpaolo ForValue and adjunct professor at the Catholic University of Milan. He is Secretary of the Association for Bank and Stock Exchange Studies (ASSBB), director of the CDEC and of Assifact. He was General Manager of Mediocredito and CEO of Mediofactoring. He has held numerous positions at the Intesa Sanpaolo group. He was head of the Research Department of the Italian Commercial Bank, adjunct professor at the University of Bergamo and Bocconi University. He is the author of numerous scientific articles and has written and edited several books on international financial markets and intermediaries as well as Islamic finance. This article was published on April 26 on The.info entry.

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