AndUSSIA May Has tried to build a “fortress economy”, but it is the West that currently looks financially impenetrable. The consequences for the rich world are far less than the deep economic crisis that the country has created due to Western sanctions. Although American stocks plummeted when the war began on February 24, they closed about 4% higher than their level on the night before the March 2 attack. European stocks are down about 4% – a big hit, but nothing compared to the ongoing financial losses in Russia, where the currency has fallen and stock market trading has been suspended for several days.
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The partially muted response reflects Russia’s low weight in the world economy: about 2% against the dollar. The country’s relative poverty and small population compared to the rest of Europe suggest that its exporters depend on European demand but not vice versa. Goldman Sachs, a bank, estimates that a 10% reduction in Russian spending will result in an export deficit of about 0.1% for the eurozone. GDP, And Britain is still low. Financial links are modest.
Yet Russia’s economic importance far outweighs that GDP Or financial impact due to its energy exports. It produces about one-fifth of the world’s natural gas and more than one-tenth of the world’s oil, driven by short-term fluctuations in global inflation. Usually 30-40% IIts gas supplies come from Russia (although in recent months it has declined by about 20% as Europe has increased its imports. LNG From America). It not only heats the houses in Europe but also gives a lot of energy to its industrial production Italy and Germany are particularly open to large economies.
Electricity prices rose dramatically on March 1st and 2nd. European natural gas prices have more than doubled since the beginning of February. Future prices for delivery in December 2022 are, therefore, a partial reflection of the cancellation of the Nord Stream 2 pipeline from Russia to Germany, which was expected to ease supply this year. Oil prices rose 25% to about $ 115 a barrel. The energy squeeze will exacerbate Europe’s inflation problem and hurt its growth. JPMorgan Chase, a bank, raised its forecast for eurozone inflation by 1.1 percentage points to 3.6% at the end of the year, while its growth forecast for 2022 fell 0.6 percentage points to 4.1%. As a producer of oil and gas, the United States has largely refrained from pulling growth, but will feel the effects of oil inflation.
The situation could worsen if sanctions were lifted to cover energy purchases, or if Russia retaliated by reducing its exports. JPMorgan Chase projects that cutting off Russian oil supplies could result in a price of $ 150 per barrel, enough to cut 1.6% worldwide. GDP When consumer prices increase by another 2%. The stagnant shock will echo the 1973 Yom Kippur War, the first of two energy crises of the decade. The collapse of the Bretton Woods system of fixed exchange rates earlier that year has exacerbated an existing inflation problem. Today there will be a lot of expensive energy stacked on top of the inflation caused by the epidemic and related stimuli.
If the flow of oil and gas continues, the existing rise in their respective prices will still make life uncomfortable for the central banks, which were preparing to raise or raise interest rates anyway. They usually tolerate inflation caused by costly energy. It disappears quickly or even goes in the opposite direction. But recently they have been worried that as inflation continues to rise since last summer, companies may feel they need to raise prices faster and workers continue to demand higher wages. Inflation, in other words, may have picked up its own momentum. Further increases in electricity prices can only exacerbate that risk যখন when high interest rates add to the pressure on growth.
Currently markets are priced for fairly conventional policy responses. Since February 1, investors’ inflation expectations, as reflected in the exchange rate, have risen sharply on a one-year horizon for the UK, the US and the eurozone. Yet expectations for long-term inflation, measured by long-term forward swaps, have not changed much (see chart). Guess what ECBTowards the end of the year, its policy rate has barely changed. Investors have set a quarterly price this year for a one-percent-point increase in interest rates in both the UK and the US. On March 2, Jerome Powell, chairman of the Federal Reserve, indicated that it would still raise rates.
However, on the long horizon there has been a sharp movement in bond yields. In mid-February, five-year German government bond yields were in positive territory for the first time since 2018. Since then they have dropped to about -0.25%. On March 1st and 2nd, the yield on an American ten-year Treasury bond fell from about 2% to 1.7%, a much higher fall than in any two-day trading period from March 2020, to 1.9% before recovering slightly the next day.
In other words, investors are betting that today’s inflation, even once raised by the war in Ukraine, will be temporary – and that long-term interest rates are likely to be slightly lower than in the past. But that doesn’t mean markets are volatile. In recent years, some scholars have argued that lower long-term real interest rates partly reflect the incentive to stockpile secure assets because the risk of tailgating – a rare but extremely expensive event – is likely to increase further. After two years of epidemics and war in Europe, that thesis did not seem so appropriate. 3
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This article was published in the print edition of the section Finance and Economics under the heading “World Economy at War”