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Source: New Zealand Treasury:

Extract from paper

Executive Summary

This paper assesses the possible long-term consequences for the New Zealand economy of the Russia-Ukraine War.

The Russian invasion of Ukraine has resulted in huge humanitarian costs and severely impacted current and future wellbeing. It is having significant short-term economic costs, most acutely in Ukraine and Russia themselves, but also throughout Europe and around the world, particularly for countries dependant on energy and food imports from these two countries. The extent and duration of these costs depends on how the conflict evolves, but already the war has contributed to a marked deterioration in global growth prospects alongside higher inflation.

The war will also impact on longer-term global geo-political and structural economic settings that New Zealand will be subject to and have to deal with. We expect the invasion will reinforce a number of transitions in the global economy already underway from existing pressures on globalisation including China/US dynamics and the COVID-19 pandemic, alongside long-standing but increasingly time dependent challenges such as climate change and the need for a “green transition”. It is these long-term implications that this note is largely focussed on.

As with the war itself, a range of futures are possible. These futures are heavily dependent on the choices of decision-makers, particularly in the largest economies and key regional groupings of the European Union and North Atlantic Treaty Organisation (NATO), and are not pre-ordained.

Our central view is that the war will exacerbate the retreat from globalisation that has been in train in recent years. Moreover, many of the underlying economic (and political) forces operating over the past few decades are likely to go into reverse, resulting in the global economy being driven by a different set of macro conditions and priorities, with the period ahead likely to be marked by a number of transitions. These include a further shift from globalisation to regionalisation, which could increase production costs and drive-up global inflation and interest rates. Global supplies of labour and energy could become scarcer and less accessible to New Zealand. Capital investment could suffer and pressure to spend on national security and prop up flagging living standards could further stretch government balance sheets already under pressure from ageing populations. As an exporter of primary products, higher food prices will be beneficial for New Zealand exporters, but lower global growth forecasts and other countries’ measures to secure their food supply such as export bans may pose risks in the longer term.

Around this central view, both more and less benign outcomes are possible. The war could represent more of a “tipping point” or “rupture” for geo-politics and the global economy. Tensions between political and economic blocks would be much increased in this scenario, heightening the chance of negative shocks. Countries could come under pressure to “choose a side” and face an increased prospect of economic coercion to influence a government’s decisions.

Conversely, if the Ukraine conflict can be quarantined enough (and Russia sufficiently isolated) to avoid broader geo-political and economic ruptures an outcome similar to the current status quo may be possible, albeit still with some reversal of the economic drivers of the past 30 years. In this scenario countries would work together in areas like climate change where international cooperation is necessary to achieve the desired outcomes.

On balance we believe we will be faced with a more fractured world, both geo-politically and in terms of economic systems and governance. Such a world is likely to be riskier for policymakers and businesses alike. Globally, trend growth (absent a future productivity boost from new technologies and/or a green transition) is likely to be lower, and inflation and interest rates higher. Financing and/or trade-offs involved in climate change adaptation and mitigation could be more acute, at least as the current shock is dealt with. Future wellbeing outcomes are likely to be similarly negatively impacted.