Putin's war in Ukraine turning point for global economy - IMF

This is stated in the report by the First Deputy Managing Director of the IMF, Gita Gopinath, seen by Ukrinform.

"The war has been a turning point also for the global economy. It has increased fragmentation pressures and raised defense spending as countries implement measures to strengthen their economic and national security," said the official.

She noted that such measures help countries adapt to the new reality of conflicts. However, when compared with the decades of efficiency-driven economic integration, these measures “will likely make the global economy more shock-prone with higher inflationary pressures, reduced potential output growth, and precarious public finances”.

Ukraine suffered the greatest consequences, Gopinath stresses. Strong global support and the macroeconomic policies implemented by the authorities, including the National Bank of Ukraine, have helped Ukraine avoid the deep macroeconomic instability that often accompanies conflicts of this scale, and quite remarkably, have kept inflation from spiraling. Even so, it is clear that the damage done to Ukraine’s economy is tremendous, with output roughly 25 percent below its pre-war level and much of the capital stock destroyed by war.

"Ongoing help is needed. The Ukraine Recovery Conference in Berlin (June 11-12) has just been discussing ways in which the world can help, and the IMF will continue to play its role," Gopinath noted.

Meanwhile, Russia’s war in Ukraine had consequences of a global scale, primarily for Europe and Ukraine's immediate neighbors in Central, Eastern, and South-Eastern Europe.

First, this is about inflation. The war has been a major supply shock for CESEE and other European countries heavily reliant on natural gas from Russia. When the gas stopped, energy prices skyrocketed (Figure 1), boosting inflation and delivering a major hit to businesses and households. Disruptions in Ukraine’s exports of grain contributed to food inflation and compounded the hit to consumers.

Second, economic growth has been affected, especially against the background of the COVID-19 pandemic, when the purchasing power of the population has decreased and rising inflation has forced central banks to tighten monetary policies.

Third, defense expenditures have increased, which will probably continue to increase, taking into account challenges to national security.

"The direct costs inflicted by Russia’s war in Ukraine are enormous. But it is easy to underestimate the ripple effects that the conflict is having on the geoeconomic landscape and global economy. In fact, I would argue the war in Ukraine has been a turning point for global economic fragmentation," said the IMF official.

As Ukrinform reported earlier, the IMF estimates that the activity of the global economy will allow growth of up to 3.2% this year, despite all existing challenges. In this regard, the chief of the Fund, Kristalina Georgieva, noted that the global environment remains challenging, and geopolitical tensions increase the risk of fragmentation of the global economy. According to the managing director, global economic activity remains weak by historical standards.