• Russia's invasion of Ukraine will affect the entire global economy by slowing growth and jacking up inflation

• The immediate impact on the global economy remains uncertain, but it would likely be skewed around inflationary pressure given the rising commodity prices brought by the supply disruption, amid lingering concern on economic sanction on Russia

• The war is boosting prices for food and energy, fueling inflation and eroding the value of incomes, while disrupting trade and supply chains

• It is also eroding business confidence and triggering uncertainty among investors that will depress asset prices, tighten financial conditions and could trigger capital outflows from emerging markets

• At the same time, food insecurity was likely to further increase

• Brent crude oil price reached as high as USD140/bbl

• Consequently, the build-up of inflationary pressure is expected to raise interest rate hike expectations as most global central banks may accelerate rate hike cycle to combat inflation

Several areas across Ukraine came under attack on 24 February after Russian President Vladimir Putin declared the start of a "special military operation" and warned of bloodshed unless Ukrainian forces lay down their arms. The move came after months of speculation about what Moscow's intentions were with the troops it had massed on the Ukrainian border. Russia’s invasion of Ukraine is the biggest military mobilization in Europe since World War II. The repercussions were immediate, and far-reaching. So far, Moscow has been denied the swift victory it anticipated, and has failed to capture major cities across the country, including Kyiv, the capital.

The war has unleashed a devastating humanitarian toll and claimed thousands of lives. It has also prompted millions of people to flee Ukraine, spurring what the United Nations has called the fastest-growing refugee crisis since World War II. Several rounds of diplomatic talks between Russia and Ukraine have failed to stop the war.

Global economic recovery will continue but has the potential to be lower than the previous expectation, in line with the increasing financial market uncertainty and the escalation of Russia-Ukraine tension. The geopolitical tension that is followed by the sanctions on Russia has affected international trade transactions, commodity price movement and global financial market even as the spread of COVID-19 cases that has subsided. Global trade volume also has the potential to be lower as compared to the previous forecast in line with the risk in global economic recovery and disturbance in the current supply chain. This will lead to a limited supply of capital flow, in line with the risk of capital flow to safe haven asset and pressure of exchange rate in developing countries.

The Russian-Ukraine conflict has been the game-changer, and this has resulted in a very difficult balancing act for the central banks all over the world. Majority of the central banks had upped their forecast for inflation and attributed the higher inflationary pressure to the global supply chain bottleneck and the impact of the Russia-Ukraine conflict on prices of crude oil, grains and base metals.

Source: BIMB Securities Research - 21 Mar 2022