Home Business News War in Ukraine raises risks of recession, Deloitte economist says

War in Ukraine raises risks of recession, Deloitte economist says

by LLB Finance Reporter
5th Apr 22 9:44 am

The war in Ukraine has dramatically dialled up the risk of a global recession, according to one of the world’s leading economists.

The conflict has thrown a ‘massive monkey wrench’ into what was a gradually improving post-pandemic picture, Ira Kalish, chief global economist at Deloitte told delegates at the World Retail Congress in Rome today.

And it could have damaging, long-term consequences that stretch far beyond the war zone.

He said that prior to Russia’s invasion of Ukraine there were some signs that the major economies of Europe and the US were starting to emerge from the pressures of the pandemic and confidence was returning.

But the outbreak of war had led to a sharp drop in exports of food and key commodities from Russian and Ukraine, notably energy and precious metals used in electronics. Supply chains had also suffered a fresh wave of disruption with some freight ships in the Baltics hit by missiles, compounding problems caused by fresh Covid outbreaks in China.

This had led to another upward leap in the cost of raw materials that was already feeding through to higher inflation, a pattern that was now likely to be much more prolonged.

That increased the likelihood of higher wage demands, particularly given a tightening of the labour pool as a result of the pandemic.

“A lot people dropped out of the workforce for a number of reasons during the pandemic,” he said.

“A lot of older workers decided to retire, a lot of parents decided to stay home and look after their families and some people decided to remain in education.

“In certain sectors such as retail people lost their jobs when shops closed and they didn’t have the skills to be part of the shift online.

“If we are going to see a much longer period of inflation it is likely to mean that this feeds through into higher wage demands.”

Dr Kalish told the conference that the backdrop presented the world’s major banks, such the the US Federal Reserve and the European Central Bank with a “major challenge”.

“They have to strike a really delicate balance between controlling inflation and not adding to what is already a much higher risk of recession in the major economies of the US, Europe and North America,” he said.

Dr Kalish added that the war combined with geo-political tensions and the pandemic were likely to drive major changes to how retailers, and other businesses, sourced goods, with less dependence on China.

“I think it has been a big surprise just how vulnerable supply chains have been to the recent shockwaves and it has caught a lot of businesses on the hop. I think we will see much greater focus on diversification within supply chains, so businesses don’t have too many eggs in one basket.”

He said that could include a switch away from just in time deliveries with businesses holding more stock. Rising wages in China, as well as its relations with Russia, could also lead businesses to seek out alternatives in countries such as India and Vietnam.

“China has played a massive part in the retail world for many years both as a growing market and as a source of production,” said Dr Kalish.

“As the Chinese economy slows and a reduction in the size of the working population leads to higher wages businesses may find it less compelling to invest in China and seek to diversify.”

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