The world economy really didn’t need another hefty blow. The Russians are still bombing Ukraine’s cities, threatening to flatten them into modern-day versions of Stalingrad. The US is warning of even tighter sanctions that are unlikely to be lifted even, if by some miracle, the fighting stops.
Now China’s industrial powerhouse, Shenzhen, has gone into lockdown (one casualty is Foxconn, forced to suspend making iPhones at two sites). Partial lockdowns have already begun in Shanghai and economists are warning extended closures might hit China’s GDP “significantly”.
Apart from its industrial might, Shenzhen’s Yantian is the world’s fourth-largest port and even a partial shutdown could disrupt global shipping. Other tech giants with Shenzhen plants include Samsung, Tencent, Huawei and Oppo. Shanghai is a semiconductor manufacturing hub. Nasdaq’s Golden Dragon Index of Chinese stocks has slid over 70 per cent from its 2021 peak. (Shenzhen’s just next to Hong Kong which is battling to contain its own Covid-19 outbreak).
All this comes when the world was just recovering from the clobbering it took from two pandemic years (and don’t think for a moment we’ve seen the last of Covid-19). European cases are climbing steadily, possibly driven by people abandoning masks and other safety measures. Says one analyst: “Covid isn’t dead. On top of that there are more shocks coming.”
India, meanwhile, is watching warily from the sidelines as the global economy reels. The government set up an inter-ministry committee to minimise the impact but there’s only so much they can do. Says Crisil chief economist Dharmakirti Joshi: “We face major uncertainties going forward. There have been sharp price increases in all major commodities and that’s hitting supply chains every step of the way from manufacturing to packaging and distribution.”
Dislocations in Russia, Ukraine and China could affect everything from agricultural items like wheat and sunflower oil to hi-tech products like mobile phones. There could be good news for some commodities producers but they’ll also be feeling the pinch because input costs are climbing for everything from fertilisers to neon, used for making semiconductor chips (over 50 per cent of the world’s neon comes from two Ukrainian factories).
Oil prices have already shot through the roof globally, hitting at one point $138 a barrel before retreating Monday to around $100. In the US, where cities are spread out and automobiles all-important, petrol has crossed an all-time high of $5/gallon. In the UK, filling your tank is even pricier at £1.7 a litre (₹170) or $8.50 a gallon. Indian petrol prices are still around ₹95 a litre but price rises are inevitable.
Other commodities like steel, aluminium, copper, nickel and palladium have also soared. The London Metal Exchange still hasn’t reopened nickel trading after prices zoomed by over 100 per cent. Steel price hikes are inevitable because coking coal is costlier and even iron ore prices, which were retreating, are moving upwards.
Agriculture is going to take a beating too. Russia and Ukraine are global granaries, producing 25 per cent of total wheat output. India could capitalise on this by exporting wheat but fertiliser prices have soared (for instance, the cost of urea, the most widely used fertiliser here, is up 110 per cent from a year ago). The higher fertiliser prices also mean the Government’s subsidy bill will swell. Most seriously, 90 per cent of India’s sunflower oil comes from Ukraine. Soyabean oil prices, too, are also up due to poor crops in other parts of the world. Cooking oil price rises could especially impact those households least able to afford them.
The reality is every country around the world will be feeling the brunt of these pressures. Says Joshi: “It’s challenging for everyone. There’s an upward pressure on inflation and downward pressure on growth for most countries in the world.” Joshi adds, “We haven’t passed on the crude prices into petroleum and diesel. Once they get passed on, it will create some further upside to inflation.” And inflation in India was already cresting higher before Russia invaded Ukraine.
But Joshi points out India may be better placed in one way — it’s only seeing supply-side inflation due to a shortage of key commodities. In the US, which pumped money into the economy to ensure demand stayed strong during Covid-19, demand and supply are creating inflationary pressures. Says Joshi: “India’s inflation is largely supply-driven. Demand is still weak. In the US, they’d given very strong stimulus so that created excess demand.”
What will the coming months look like? Joshi reckons that will depend on how long the conflict continues. Also, there’s the tricky question of when sanctions will be eased. Crisil is currently projecting oil prices will be a problem for another quarter and could start tapering after that. However, if the fighting continues, all bets would be off.
And how’s the economy placed in other ways? Joshi reckons the rupee won’t suffer too badly and could stabilise around ₹77. But the Government may have to spend more heavily than planned on subsidies and that could hit its massive capital expenditure plans in two ways.
Firstly, it will have less money to spend on building infrastructure and, secondly, the money won’t stretch so far. Says Joshi: “What happens to capex is the cost of creating infrastructure is also rising with steel and cement prices going up. So with the same amount of money, you won’t be able to create the same amount of infrastructure you intended.”
The little good news is the economy is stronger than during the 2013 “taper tantrum” when the world was coming out of a global financial crisis and the US Federal Reserve began cutting stimulus, prompting foreign investors to exit India and other emerging markets (sending the rupee plunging 15 per cent).
The RBI has plentiful reserves to ensure an orderly rupee retreat. Says Joshi: “The current account deficit is still under control and the external debt isn’t too much. These things provide some optimism.” He admits though it’s tough to find bright spots. Crisil was looking at hiking its 7.8 per cent growth prediction for next year but it’s holding off.
Are there other hopeful aspects to offset this doom-and-gloom picture? China’s Covid wave might prove to be less worrisome because it’s the milder Omicron variant. Aside from that, not really. The 1970s word ‘stagflation’ — high inflation (US inflation is at a 40-year high), low growth — has resurfaced. US interest rates may start rising this week. Goldman Sachs is warning the US and Europe could be slammed into recession. While investors are always advised to buy at the moment of “maximum pessimism,” analysts say they may still have to wait a while.
March 15, 2022