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War in Ukraine: how to forecast the impact on the world economy?

Raul Sampognaro
economist in the analysis and forecasting department of the OFCE
Key takeaways
  • Germany is the country most affected by the Russian invasion, with a loss of 1.1 points of GDP, compared to a loss of 0.4 points for France.
  • World trade fell by 0.7 points in volume, and world industrial production by 0.6 points.
  • The evolution of oil, gas and electricity prices would have cut French growth by 1.4 points, but the shock was compensated by fiscal policy.
  • By mobilising resources to alleviate the energy crisis, we end up with fewer resources to ensure the environmental transition.
  • Rising tensions between the US and China may be a new source of uncertainty, which could have a major impact on global economic activity.

On 24th Feb­ru­ary 2022, Rus­sia invad­ed Ukraine. Beyond the direct effects on the coun­tries involved in the con­flict, there were numer­ous eco­nom­ic impacts on oth­er states. Raul Sam­pog­naro, an econ­o­mist at OFCE (Obser­va­toire français des con­jonc­tures économiques), has worked on the impact of the war in Ukraine on the eco­nom­ic activ­i­ty of six coun­tries: France, the Unit­ed States, the Unit­ed King­dom, Ger­many, Italy, and Spain. To do this, the researcher used an indi­ca­tor that cal­cu­lates the lev­el of geopo­lit­i­cal risk.

What is the starting point for your study?

At the OFCE, we make two fore­casts a year on the state of the world and French economies. At the begin­ning of 2022, the war in Ukraine was one of the major shocks for the world econ­o­my. We had to try to quan­ti­fy the impact of this shock on the tra­jec­to­ry of the French econ­o­my. In a total­ly unre­lat­ed way, at the begin­ning of the year, two Ital­ian researchers, Dario Cal­dara, and Mat­teo Lacoviel­lo, pub­lished a quan­ti­ta­tive indi­ca­tor of geopo­lit­i­cal risk that uses very old and very exten­sive data­bas­es based on press arti­cles, main­ly from the Eng­lish-speak­ing press, talk­ing about geopo­lit­i­cal risks and ten­sions. With new tech­niques in Big Data, they select a dic­tio­nary of words relat­ed to geopol­i­tics and count the num­ber of arti­cles talk­ing about these sub­jects. The pro­por­tion of arti­cles talk­ing about geopol­i­tics is their mea­sure of geopo­lit­i­cal risk. Fur­ther­more, both researchers man­age to cre­ate coun­try risk indices. I have there­fore repro­duced their method­ol­o­gy for the six coun­tries that the OFCE fol­lows, includ­ing France.

Is Dario Caldara and Matteo Lacoviello’s geopolitical risk indicator effective?

If we look at the geopo­lit­i­cal risk index on a glob­al lev­el, the last four sig­nif­i­cant peaks were the Gulf War in the 1990s, Sep­tem­ber 11th 2001, the war in Iraq, and the out­break of the Ukraine war a year ago. These are the mas­sive geopo­lit­i­cal shocks that have been iden­ti­fied by this index since 1985. For the French geopo­lit­i­cal risk index, in the first quar­ter of 2022 there is an increase of almost 4 stan­dard devi­a­tions – a very big change. For Ger­many, the shock is equiv­a­lent to 6 stan­dard devi­a­tions, which is explained by the fact that the coun­try is very depen­dent on Russ­ian fos­sil fuels. After Euro­pean coun­tries, there are also Chi­na and the Unit­ed States. This method­ol­o­gy clear­ly shows the effects and depen­den­cies of the dif­fer­ent coun­tries in response to this glob­al shock.

How did you adapt this indicator to calculate the impact of the war in Ukraine?

I tried to find the cor­re­la­tions of these sud­den and unfore­see­able evo­lu­tions on macro-eco­nom­ic vari­ables. For France, I made a mod­el where this index is cor­re­lat­ed with five vari­ables: busi­ness invest­ment, GDP, prices, and inter­est rates. I also added effects on the stock mar­ket: the CAC 40.

What are your results?

In France, the shock is 0.4 points of GDP com­pared to 1.1 points in Ger­many. Italy, the Unit­ed King­dom, and the Unit­ed States are next with 0.3 points less. Final­ly, Spain saw a 0.2 point drop. We have also car­ried out analy­ses on the world econ­o­my: in terms of vol­ume, world trade – exclud­ing price and com­mod­i­ty effects exclud­ing gas – would have fall­en by 0.7 points. World indus­tri­al pro­duc­tion would have fall­en by 0.6 points, which is con­sis­tent with the mag­ni­tude of the shock in the advanced countries.

In this study, you are specifically interested in the impact of geopolitical risk, leaving aside the effect of the energy crisis…

We have assessed the mar­ket relat­ing specif­i­cal­ly to clean ener­gy using oth­er tools. Accord­ing to the mod­el we use, a geopo­lit­i­cal risk shock will reduce invest­ment, which decreas­es GDP. It is there­fore an effect pure­ly linked to uncer­tain­ty: play­ers delay or stop cer­tain projects, par­tic­u­lar­ly in the long term – some­thing we quan­ti­fy as being 0.5 points.

What are the effects of this energy crisis on GDP, according to your forecasts?

The first major shock in 2022 will be the rise in the price of raw mate­ri­als and ener­gy. The evo­lu­tion of the price of oil, gas and elec­tric­i­ty would have reduced French growth by 1.4 points, but this shock has been part­ly com­pen­sat­ed by fis­cal pol­i­cy, with many mea­sures to mit­i­gate the con­se­quences of this cri­sis. We have eval­u­at­ed the sup­port to French activ­i­ty of these mea­sures at 0.8. The ener­gy cri­sis there­fore adds 0.6 points of GDP loss in 2022.

The ener­gy cri­sis adds 0.6 points of GDP loss in France in 2022.

Beyond GDP, the evo­lu­tion of the price of oil and gas is a dete­ri­o­ra­tion of the terms of trade for France. Con­sum­ing so many import­ed prod­ucts shows that we need to pro­duce more. INSEE shows that the loss of nation­al income, the nation’s pur­chas­ing pow­er, has nev­er been so degrad­ed since the first oil shock in the 1970s. There is an effect of geopo­lit­i­cal ten­sions, but we must not for­get that the pri­ma­ry shock comes from energy.

More generally, what lessons can be drawn from 2022?

There is a pos­i­tive side: we have been able to adapt to the ener­gy shock. On the neg­a­tive side, inter­na­tion­al rela­tions are not going to nor­malise. We are com­ing out of this sequence with a much larg­er pub­lic debt, we have mobilised a lot of resources to com­pen­sate for the ener­gy shock. And implic­it­ly, it is these mobilised resources that would have been use­ful to facil­i­tate the envi­ron­men­tal tran­si­tion and to sub­sidise the con­sump­tion of fos­sil fuels. This is the oth­er neg­a­tive lega­cy of the sequence: we are leav­ing with few­er resources for the envi­ron­men­tal transition.

With the war in Ukraine continuing, is the geopolitical risk still as great?

When the new state of the world becomes a cer­tain­ty, the “uncer­tain­ty” argu­ment dis­ap­pears. Spon­ta­neous­ly, some inter­na­tion­al trade flows will renor­malise, oth­ers will remain per­ma­nent­ly halt­ed. The 0.5 points of GDP will not be 100% lost, but not 100% recov­ered either. Fur­ther­more, we are see­ing ten­sions rise between the Unit­ed States and Chi­na, which may have a dif­fer­ent quan­ti­ta­tive impact on the scale of world pro­duc­tion, which was very much ori­ent­ed towards Asia. There may be a much more mas­sive recon­fig­u­ra­tion if these ten­sions per­sist. That’s anoth­er uncer­tain­ty that could impact the deci­sions of multi­na­tion­al com­pa­nies in a fair­ly long-last­ing way.

Sirine Azouaoui 

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