What the conflict in Ukraine means for the US economy

Russia’s threat to invade Ukraine could have economic consequences globally and in the United States, increasing instability, wobbling commodity markets and potentially driving up inflation as gas prices and food growth in the world.

Russia is a major producer of oil and natural gas, and the ongoing geopolitical conflict has caused the prices of both beers to surge in recent weeks. It is also the world largest wheat exporterand is a major food supplier to Europe.

The United States imports relatively little directly from Russia, but the scarcity of goods due to the conflict could have a direct, at least temporary, effect on the price of raw materials and finished products as much of the world, including including the United States, are experiencing. rapid inflation.

Global unrest could also worry US consumers, prompting them to cut spending and other economic activities. If the slowdown turns out to be severe, it could make it difficult for the Federal Reserve, which is planning to raise interest rates in March, to decide how quickly and aggressively it will raise borrowing costs. Central bank note in minutes from their most recent meeting Geopolitical risks “could cause an increase in global energy prices or exacerbate global supply shortages,” but they are also risks to the growth outlook.

The extent of the potential economic consequences is unclear, because the scope and scale of the conflict remains anything but certain. But a foreign conflict could further delay a return to normalcy after two years during which the coronavirus pandemic has ravaged both the global and US economies. Tensions between Russia and Ukraine are escalating as American consumers have compete with the rapid increase prices, businesses are trying to navigate established supply chains, and people say they feel pessimistic about their financial outlook strong though economic growth.

“The level of economic uncertainty will increase, which will be negative for households and businesses,” said Maurice obsfeld, a senior fellow at the Peterson Institute for International Economics. He notes that this effect will be felt most profoundly in Europe and to a lesser extent in the United States.

One major and immediate economic implication of the crisis in Eastern Europe involved oil and gas. Russia produce 10 million barrels daily oil production, which accounts for about 10% of global demand and is Europe’s largest supplier of natural gas, used to fuel power plants and provide heat for homes and enterprise.

The United States imports relatively little Russian oil, but the market for energy commodities is global, meaning that price changes in one part of the world will affect how well people pay for energy. in other places.

It’s not clear how far a conflict will push prices, but energy markets have been turbulent – and fuel prices have skyrocketed – with the prospect of an invasion.

If oil rises to $120 a barrel by the end of February, breaking past the $95 mark it hovered over last week, inflation as measured by the Consumer Price Index could rise to nearly 9% in a matter of months. instead of the current expected peak, said Alan Detmeister, an economist at UBS who previously led the prices and wages department at the Fed.

“The question is: How long will the price of oil, the wholesale price of natural gas go up?” he say. “That’s anyone’s guess.”

Patrick De Haan, head of petroleum analysis at GasBuddy, said the $120 a barrel mark for oil is a reasonable estimate of how high prices can go. On average, that would translate to about $4 per gallon at the pump, he said.

It can be difficult to determine to what extent the change in energy prices is due to the nascent conflict. Omair Sharif at Inflation Insights notes that oil and gas prices have risen this year.

“I don’t know when you want to start the clock on Ukraine becoming a big headline,” Mr. Sharif said. Additionally, from a US inflation point of view, the magnitude of the conflict “all depends on the level of US involvement.”

Oil may be the main story when it comes to the inflationary impact of the conflict with Russia, but it’s not the only one. Ukraine is also a significant producer of uranium, titanium, iron ore, steel and ammonia, and is Europe’s main source of arable land.

Christian Bogmans, an economist at the International Monetary Fund, said the conflict in Ukraine could further increase global food prices, which are set to stabilize after soaring last year.

Russia and Ukraine are jointly responsible for nearly 30% of global wheat exports, while Ukraine alone accounts for more than 15% of global corn exports, he said. And many of Ukraine’s wheat and corn growing regions are located near the Russian border.

Rising gas and fertilizer prices, as well as drought and adverse weather in some regions, such as the Dakotas, have contributed to global prices for wheat and other commodities. Ukraine is also a significant producer of barley and vegetable oils, which are used in many packaged foods.

“In the event of a conflict, production could be disrupted and transportation could also be affected,” said Mr Bogmans. If other countries impose sanctions on Russian food items, he said, that could further constrain global supply and drive up prices.

But since food costs make up a relatively small part of inflation, that may not matter much for the overall price data, said Detmeister at UBS. It is also difficult to predict exactly how import prices will form because of the potential for currency fluctuations.

If a conflict fuels global instability and causes investors to pour money into dollars, driving up the value of the currency, it could actually make U.S. imports cheaper.

Other trade risks are evident. Uncertainty in the relationship of Europe and Asia could pose risks to supply chains already affected by the pandemic.

Phil Levy, chief economist at Flexport, says that Russia and Ukraine are less connected to the global supply chain than a country like China, but conflict in the region could disrupt flights from Europe. Asia to Europe. That could pose challenges for industries that ship products by air, such as electronics, fast fashion and even auto manufacturers, he said at an event at the National Press Foundation on Wednesday. February 9th.

“Air is a vehicle for solving supply chain problems,” Mr. Levy said. “If your factory is going to close because you don’t have a critical part, you can fly in that critical department.”

Some companies may not yet realize their true risk to a potential crisis.

Victor Meyer, chief executive officer of Supply Wisdom, which helps companies analyze their supply chain risks, said that some companies were surprised at how exposed they were to the region during the invasion. Russia into Ukraine in 2014, when it annexed Crimea.

Mr. Meyer noted that if he were the chief security officer of a company with ties to Ukraine, “I would strongly encourage to reduce my exposure.”

There could also be other indirect effects on the economy, including consumer confidence.

Households are hoarding cash and perhaps can afford a higher price at the pump, but escalating energy costs could make them unhappy at a time when prices in general have escalated and minds economy has deteriorated.

Ian Shepherdson at Pantheon Macroeconomics wrote in a note on Feb. 15: “The hit could be easily absorbed, but it would make consumers more miserable and we have to assume that a war in Europe will also undermine trust directly.”

Another risk to US economic activity may be underestimated, Mr. Obsfeld said: The threat of cyberattacks. Russia could respond to sanctions from the United States with a digital retaliation, destroying digital lives at a time when the Internet has become central to its economic existence.

“The Russians are the best in the world at this,” he said. “And we don’t know the extent to which they got into our systems.”

https://www.nytimes.com/2022/02/23/business/economy/russia-ukraine-global-us-economy.html What the conflict in Ukraine means for the US economy

Fry Electronics Team

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