‘The greatest supply shock since at least the early 1970s’: EBRD says war on Ukraine to cause major growth slowdown

The war on Ukraine will have a severe effect on economies far beyond the immediate area of the conflict, according to new research from the European Bank for Reconstruction and Development (EBRD).

In its first economic forecast since the war began, the EBRD has cut its growth forecast for 2022 for the regions where it operates by more than half – to 1.7 per cent, down by 2.5 per cent on its previous forecast. It forecasts sturdier growth across its regions of 5 per cent in 2023.

Describing the effects of the war as “the greatest supply shock since at least the early 1970s”, the Bank predicts that the increased cost for commodities such as food, oil, gas and metals will have a profound impact on economies, particularly those in lower income countries. The EBRD reminds that Russia and Ukraine supply a disproportionately high share of commodities, including wheat, corn, fertiliser, titanium and nickel. 

Although a high degree of uncertainty remains, it is clear that many economies will be severely hit and that some will suffer more than others. For example, the EBRD expects Ukraine’s GDP to fall by 20 per cent this year instead of growing by 3.5 per cent. Russia’s GDP will fall by 10 per cent instead of growing by 3 per cent.

The EBRD also predicts pressure on Caucasus and Central Asian currencies as markets overestimate geopolitical risks and hit tourism in many countries, including Armenia and  Georgia.

The report also examines the potential consequences of the greatest forced displacement of people since the Second World War in Europe.

According to the EBRD, skilled workers from Ukraine may provide a boost to some economies in the longer term, particularly in countries with ageing populations. In the short term, economies are facing fiscal pressures and administrative challenges as they scale up the provision of housing, healthcare and schooling.

The EBRD forecasts assume that a ceasefire is brokered within a couple of months, followed soon after by the start of a major reconstruction effort in Ukraine, which will bring GDP by end-2023 back close to, but still below, pre-war levels.

Sanctions on Russia are expected to remain for the foreseeable future, condemning the Russian economy to stagnation in 2023 (after a sharp GDP drop in 2022), with negative spillovers for a number of neighbouring countries in eastern Europe, the Caucasus and Central Asia.

With so much uncertainty, the Bank intends to produce a further forecast in the next couple of months, taking into account further developments.

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