The Endless Ukraine War... The World in a Wartime Economy [Ukraine Shockwave①]

Three Months into the Ukraine War, Signs of Prolonged Conflict
Global Economy Slumps Again After COVID-19 Recovery
WTI Fluctuates Around $110, Fear of 'Third Oil Shock'

[Image source=EPA Yonhap News]

[Asia Economy Reporter Lee Hyun-woo] Although the Ukraine war has entered its third month, the possibility of a ceasefire negotiation between the two sides is becoming more distant, showing signs of prolonged conflict. As forecasts that the war will last more than a year become dominant, countries around the world are effectively entering emergency economic systems assuming a ‘wartime economy.’

Economic experts are significantly lowering growth forecasts, fearing extreme international oil price hikes and inflation similar to the two oil shocks in the 1970s. Countries like South Korea, which have high import dependence on key resources and export-driven economies, are expected to face even more challenging environments going forward.

☞ Wartime economy (戰時經濟·wartime economy) = A series of economic policies adopted by modern states to sustain the national economy during wartime. For countries involved in war, it shifts to an emergency economic system that allocates all resources to war expenses and procurement of weapons and troops. Countries not directly involved control exports and imports of key raw materials including energy resources and participate in international sanctions to restrict trade and financial activities with specific countries. (Source: Investopia)

◇The whole world is experiencing a wartime economy

[Image source=AP Yonhap News]

Generally, a wartime economy refers to the special economic conditions faced by countries engaged in war. During war, production facilities are destroyed, limiting supply, while demand for raw materials to manufacture military supplies increases significantly. Along with this, labor shortages cause severe inflation. Effectively controlling the wartime economy is also a crucial factor determining the outcome of the war.

Russia’s invasion of Ukraine is not a war fought by just two countries. Since Russia crossed Ukraine’s border on February 24, the conflict has escalated into a proxy war between Russia and Western countries. To support Ukraine, allies such as the United States, the European Union (EU), and the Group of Seven (G7) have imposed various economic sanctions on Russia, and the shockwaves are felt worldwide.

Energy and food prices are soaring, and raw material supply disruptions are causing production setbacks. Not only the war parties Russia and Ukraine but people worldwide are experiencing a wartime economy together.

In this regard, Mark Sandbu, a Financial Times (FT) columnist, recently emphasized in an article titled "Western leaders must prepare the public for a wartime economy" that the time is approaching when governments must explain to citizens why living costs are rising.

◇"Still optimistic considering wartime conditions"

[Image source=AP Yonhap News]

The global recession expected during wartime conditions is also anticipated to be experienced worldwide. As the Ukraine war surpasses three months, economic outlooks have become increasingly pessimistic.

Paolo Gentiloni, European Union (EU) Commissioner for Economy, said in an interview with Italian media La Stampa on the 21st (local time), "The global economy, which was recovering after COVID-19, has completely fallen into recession due to the Ukraine war," adding, "Even the current economic growth forecasts are very optimistic considering wartime conditions." The International Monetary Fund (IMF) lowered its global economic growth forecast from 4.4% to 3.6% last month considering the Ukraine situation but warned it could decline further.

Robin Brooks, Chief Economist at the Institute of International Finance (IIF), also pointed out in a recent interview with FT, "The situation has changed significantly since the IMF revised its forecast in April," and "Major investors now believe there is a possibility of global economic contraction this year."

The U.S. GDP growth rate for the first quarter of this year, announced at the end of last month, was recorded at -0.4% quarter-on-quarter, marking a contraction for the first time in seven quarters since the second quarter of 2020.

◇Is a ‘third oil shock’ coming?

The main cause of global recession concerns is the surge in international oil prices and inflation following the Ukraine war. The price of West Texas Intermediate (WTI) crude oil reached $123.70 per barrel on March 8, just two weeks after the outbreak of the Ukraine war, up 62.59% from the beginning of the year, and has since fluctuated around the $110 level.

If international oil prices remain above $100 for several months, corporate costs will rise sharply, raising concerns about a 1970s-style oil shock. Experts believe that the economic impact caused by wartime conditions takes about three months to translate into inflation, so the longer the war lasts, the higher the likelihood of complex price increases.

According to the Wall Street Journal (WSJ), during the first oil shock from January 1973 to January 1974, international oil prices rose sharply by 369.75%, from $2.48 to $11.65 per barrel based on Arab Light crude.

During the second oil shock, which lasted nearly two years from December 1978 to October 1980, international oil prices increased by 191.33%, from $12.7 to $37 per barrel. During the two oil shocks in the 1970s, major oil-producing countries such as Saudi Arabia and the Arab League, as well as Iran, were involved in external wars, severely restricting international oil supply and causing prices to surge.

◇Europe faces an energy crisis, developing countries face a food crisis

[Image source=Reuters Yonhap News]

European countries, which heavily depend on Russian energy, are increasingly concerned about economic deterioration due to soaring energy prices. If the war prolongs and sanctions against Russia intensify, completely cutting off Russian energy imports, a prolonged recession is expected.

If Russian energy imports are completely halted, the EU economy is expected to suffer a significant blow. The European Commission previously revised the growth forecast for the 19 Eurozone countries using the euro to 2.7% this year, down 1.3 percentage points from the February forecast of 4%.

The European Commission stated, "The war is adding upward pressure on raw material prices, causing further supply disruptions, increasing uncertainty, and worsening the existing headwinds to growth that were previously expected to ease."

[Image source=Reuters Yonhap News]

Developing countries must worry about a food crisis immediately, even before economic recession. There are forecasts that millions of people worldwide could starve due to the food crisis ignited by the Ukraine war.

With Ukraine accounting for over 30% of global grain production, food exports have been halted due to the war, causing food prices to skyrocket. Emerging countries are successively blocking food exports. According to the U.S. think tank Peterson Institute for International Economics (PIIE), since the Ukraine war, 14 countries worldwide including India, Iran, Turkey, and Argentina have controlled exports of various grains and edible oils.

The Food and Agriculture Organization (FAO) of the United Nations announced in March that the global food price index reached 159.3, marking an all-time high.