Pressures on global economy and inflation are escalated from the Ukraine war; Eurozone accelerates its wind-down monetary stimulus
US and UK impose sanctions on Russian oil; Krungsri Research foresees the war would cut global GDP growth by 0.5-2.9 ppt. Despite offering to drop future NATO membership, talks have not led to a Russian ceasefire. Meanwhile, the US and its allies are stepping up the pressure on Russia, most recently with President Biden announcing that the US will ban imports of Russian oil and gas. The UK is likewise planning to block purchases of oil from Russia. Nonetheless, the EU has not joined similar measures.
To assess the impacts of the war on the global economy, we have developed a range of scenarios looking at the length of the conflict and severity of sanction measures. We look in particular at 3 outcomes of different scenarios (see page 2 for details) Under these scenarios, relative to the baseline, global GDP would decline by 0.5, 1.3 and 2.9 ppt, inflation may increase by 1.3, 2.0 and 3.6 ppt, and world exports would drop by 1.1, 3.4 and 3.9 ppt. In these cases, the Eurozone is the worst affected economy, with the most serious outcomes coming if fighting continues into mid-2022, the West imposes tighter sanctions on Russia, and Russia responds by blocking energy exports to Europe. This would then trigger an energy crisis that could slash an estimated 4.8% from previous projection. The bloc’s inflation would rise by 6.8% relative to baseline figure, and potentially transmit stagflation to other countries.
Eurozone is likely to speed up normalization amid rising inflationary pressure from Ukraine crisis. The ECB maintained its policy rates and asset purchases made under the Pandemic Emergency Purchase Program (PEPP). When the PEPP ends this March, the Asset Purchase Program (APP) will replace the EUR 40-50bn/month buying from the PEPP with bond purchases of up to EUR 40bn/month in April. This will be cut back to EUR30bn in May and then to EUR 20bn from June.
The ECB signals to speed up its normalization with faster plan to scale back APP purchases. Previously, it is expected to cut asset purchases from EUR 40bn in 2Q22 to EUR 30bn in 3Q22, and then to EUR 20bn from October. This change is being driven partly by 4 months of strong inflation that pushed inflation rate to 5.8% in February, significantly above the ECB’s 2% target. The ECB President has stated that the crisis in Ukraine may add significantly to pressure on prices, and the ECB thus now sees 2022 inflation averaging 5.1%. Given this, we expect that ECB will raise policy rates in December with the first move of 25 bps, following by further 1 or 2 increases in 1H23.
US Inflation reached its 40-year high; Fed is likely to raise rates this week. In February, headline and core inflation climbed to respectively 7.9% and 6.4%, its highest since August 1982. In March, the University of Michigan survey showed that inflation expectation for the next 12 months jumped to 5.4%, the highest since 1981.
The US is struggling against strong inflation that has become broad-based across product groups, lifted core inflation to a 40-year high, and raised prices by above 4% in more than two-thirds of product categories. We thus expect 5 rate increases in 2022, with a 25 bps hike in this month as the Fed attempts to anchor expected inflation with its target. However, the effects of the sanctions on Russia and March’s surge in energy prices have yet to be fully felt, and we thus believe that US inflation has not yet peaked.
Analysis based on range of scenarios for the Ukraine-Russia war indicate that the conflict may cut Thai GDP growth by the range of 0.4-2.4 ppt
The subsequent energy crisis from conflict Ukraine has weakened confidence and undercut Thailand’s recovery. In February, economic indicators worsened, with the Consumer Confidence Index softening for the 2nd month by dropping from 44.8 to a 5-month low of 43.3, and the Thai Industries Sentiment Index (TISI) likewise weakening for the first time in 6 months on a fall from 88.0 to a 3-month low of 86.7. Sentiment worsened on a combination of fears over the rise in new Omicron infections and the possible impacts of this on economic activity, as well as the surge in energy prices, which may then push up manufacturing and transport costs, and add to the cost of living.
To assess the impacts of the Russian attack on Ukraine, we have identified 3 likely scenarios: (i) an end to fighting in March, with Western sanctions on some of Russia’s trade and financial transaction maintained until the end of 2022; (ii) an extension of hostilities into 2Q22, with sanctions intensified to cover all non-energy exports from Russia; and (iii) a spread of hostilities to other countries and an extension of these to mid-2022, provoking strong sanctions from the West that are met with a ban on Russian exports of energy to Europe, thus triggering a European energy crisis. The main channels by which the effects of the crisis will be transmitted via 4 channels, which are trade and transport, energy security, price stability, and impacts on income and capital markets.
We have used a dynamic stochastic general equilibrium (DSGE) model to calculate the impacts of these 3 scenarios on the global and Thai economies. For Thailand, relative to the baseline case, these 3 outcomes result in a cut to expected growth of 0.4, 1.1 and 2.4 ppt, a boost to inflation of 1.4, 2.3 and 3.5 ppt, and a drop in exports of 1.1, 3.0 and 4.7 ppt.
The results of the analysis indicate that Thai industrial sectors are likely to experience high adverse impacts, including construction, transportation, oil refinery, maritime shipping, and real estate. These sectors would be hurt by higher cost of production, especially from metal and energy. However, higher prices and trade diversion will mean that some industries will likely benefit from stronger output. This group is expected to include producers of oil and natural gas, sugar processors, and manufacturers of clothing, electronics and leatherware. (See full report: The potential impacts of the Ukraine war on the Thai economy)
The pressure from rising energy prices is beginning to be felt, and the authorities are preparing to raise the price paid by households for cooking gas to THB 333 per 15 kg cylinder (from 1 April), and from May, to put up fuel tariff (Ft) adjustment charge for electricity prices. In response to this, measures to ease higher costs will be targeted at the country’s 13.5m welfare card holders, through (i) an increase in discounts on cooking gas from THB 45/person every three months to THB 100, and (ii) gasoline prices subsidy for motorbike drivers who are also welfare card holders.