- Russia’s invasion of Ukraine has been felt throughout the whole world, financially and emotionally.
- In a worst-case economic scenario, McKinsey says that Europe and the US could fall into recession.
Putin’s invasion of Ukraine has shaken the world, as countries around the globe heap sanctions on Russia, Ukrainians are thrust into a new wartime reality, and the world is missing out on two major food suppliers.
Now, management consulting firm McKinsey has published a report laying out how the ongoing conflict could impact economies all over the globe.
Both Russia and Ukraine are already facing down dire economic circumstances. As sanctions roil the Russian economy, it could fall into recession as early as this April. The International Monetary Fund said that Ukraine’s economy could potentially shrink by a third this year amidst the invasion. For everyday Russians, many of whom may not support the war, the invasion has disrupted the country’s previously strong economic recovery from the pandemic.
The outlook isn’t good for the global economy either. McKinsey analysts look at several scenarios. In one, the situation is “severe” and “escalating,” as it gets longer and bigger; sanctions ramp up, the refugee crisis grows more dire, and markets get disrupted while countries use a moderate policy response as they exit pandemic-era stimulus programs.
In that scenario, the US and eurozone, which is comprised of European countries who use the euro as currency, could even end up spiraling into a recession as refugees continue to pour in, food and gas prices continue to spike, and overall inflation continues to grow.
Prices in the US could continue to climb as economic growth slows
While the US’ economic recovery from the pandemic seems to be chugging along, inflation is still high. The prices of just about everything — especially the things American need the most like food and gas — are going up.
The Fed has stepped in to try and cool that inflation by raising interest rates for the first time during the pandemic era, and will very likely keep increasing rates throughout the year, which would make borrowing more expensive and therefore reduce demand for loans and credit cards. Although, as Insider’s Ben Winck reports, how many times rates will rise and the effect they will have on the broader economy is still unclear.
“It appears that the invasion of Ukraine will only slow the pace of interest-rate hikes, not change the course of policy in the United States,” McKinsey says. While rising interest rates could quell spending and ease inflation, uncertainty around the invasion may mean the Fed approaches this tool with a slower schedule.
If there is “severe” and “escalating” disruption, oil prices would stay high — and confidence would get “shaken” — leading everyone to spend less. That would spell recession for the US.
Indeed, there could be “strong potential” for recession in the US, as inflation remains high in 2022 and 2023, according to asset management firm TCW. It may just be a throwback to the economy of the 1970’s, where stagflation — stalled growth, paired with high prices — was the name of the game.
A refugee crisis could fuel Europe’s economic troubles
Central Europe’s “refugee crisis” could worsen as the war goes on. The UN has already said that the refugee crisis in Ukraine is beyond its “worst-case scenario,” with about 10 million Ukrainians already fleeing their homes.
Under the severe scenario that McKinsey writes about, Europe would see gas prices more than double, and inflation shoot up over 7%.
For the eurozone, that spells recession in 2022 and 2023, with inflation finally easing by the middle of 2023, and employment and growth not fully recovering until 2024. Europe already took a big financial blow from the pandemic, seeing a “double-dip” recession, according to the BBC. The eurozone fell into its second recession in early 2021 after the initial shock from the early pandemic in spring 2020.