The war in Ukraine has created a new negative supply shock for the world economy, just when some of the pandemic-induced supply-chain challenges appeared to be starting to fade, says the latest economic outlook released by the Organisation for Economic Cooperation and Development (OECD). The effects of the war will operate through many different channels, and are likely to evolve if the conflict deepens further, it says.

In some respects, the direct role of Russia and Ukraine in the global economy is small. Together, they account for only about 2 per cent of global gross domestic product at market prices and a similar proportion of total global trade, with limited bilateral trade for most countries.

Financial linkages with other countries are also generally modest. Stocks of foreign direct investment in Russia, and by Russia in other economies, account for between 1-1.5 per cent of the global total. Consolidated cross-border bank claims by the Bank for International Settlements reporting banks on residents of Russia and Ukraine represented less than 0.5 per cent of the global total as of the third quarter of 2021, the report says.

There are some possible longer-term consequences from the war, including pressures for higher spending on defence, the structure of energy markets, potential fragmentation of payment systems and changes in the currency composition of foreign exchange reserves.

A re-division of the world into blocs separated by barriers would sacrifice some of the gains from specialisation, economies of scale and the diffusion of information and know-how.

The exclusion from the SWIFT message system could accelerate efforts to develop alternatives. This would diminish the efficiency gains from having a single global system, and potentially reduce the dominant role of the US dollar in financial markets and cross-border payments, the report adds.

Fibre2Fashion News Desk (DS)

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