5 Long-Term Effects of Ukraine War on U.S. Economy: The Economist

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5 Long-Term Effects of Ukraine War on U.S. Economy: The Economist

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5 Long-Term Effects of Ukraine War on U.S. Economy: The Economist

by Michael S. Fischer

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5 Long-Term Effects of Ukraine War on U.S. Economy: The Economist

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1. The risks of stagflation are rising.
U.S. trade with Russia and Ukraine is minimal, but the war will fuel already high inflation and slow growth in consumer spending. Even before the Feb. 24 invasion, commodity prices were surging globally. The further war-induced rise in global commodities prices comes at a time when U.S. inflation is already at a 40-year high.

The EIU expects U.S. inflation to remain at current levels of nearly 8% year on year until at least mid-2022, weighing on consumer spending and real GDP growth. As a result, it has lowered its forecast for U.S. real GDP growth this year from 3.4% to 3%.

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2. No change is in sight for the Fed’s policy.
To counter inflation, the U.S. Federal Reserve lifted its key federal funds rate by 25 basis points on March 16, the first increase since 2018. The Fed has announced plans for six more quarter-point rate increases this year, which may be revised up if commodity prices rise faster than expected because of the war in Ukraine.

The EIU expects the Fed to orchestrate a soft landing for the U.S. economy, but notes that the economic fallout from the war and other external factors expose the U.S. to the growing risk of stagflation — low growth combined with high inflation.

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3. The U.S. is sensing an opportunity in the energy field.
The U.S. alone will not be able to fill the current gap created by European countries’ expected shift away from Russian energy imports, but it will still boost domestic production and become an even larger global energy exporter than it currently is — the world’s fourth-largest crude oil exporter and second-largest natural gas exporter. To meet growing local and international demand, the U.S. will have to accelerate its plans to increase output, notably in the liquefied natural gas sector.

The EIU estimates that by year-end, the U.S. will have the largest LNG export capacity in the world, and will overtake Qatar and Australia in export volumes in 2023.

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4. The West remains united — for now.
The high level of collaboration between the U.S. and other NATO countries has surprised many, not least Moscow and Beijing, and has been most visible in the sanctions targeting the Russian economy. The war has also pushed Germany and other countries to announce plans to boost military spending to at least 2% of GDP, addressing a sore spot in U.S. relations with European NATO members.

But the EIU expects fissures in the Western alliance to emerge as the war drags on. This already happened a few days into the conflict, when the U.S. quickly banned Russian energy imports but the European Union did not because of its dependence on Russian energy. European powers are also likely to become more assertive to defend what they think are their own economic interests as they seek greater autonomy from the U.S. in setting their own defense and foreign policy.

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5. U.S.-China tensions will get even worse.
The war in Ukraine will deepen the rift between China and the U.S. The EIU expects China to pursue greater cooperation with Russia over the long term, notably by negotiating for cheaper energy commodities that Europe no longer buys. It also believes that China will be able eventually to serve as Russia’s sole provider of technology components. The U.S. will threaten to impose secondary sanctions on Chinese businesses that do business with Russia.

The EIU also expects the war to distract the U.S. from its previous attempts to increase its influence in Asia. Facing less competition, China will seek to expand its influence primarily through economic means. In the long term, the EIU foresees a Western-bashing bloc led by China and Russia and a Western-leaning bloc led by the U.S. and the EU.

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Related: Bob Doll: 10 Talking Points for Advisors, Investors Amid Russia-Ukraine War

Russia’s invasion of Ukraine will have important effects on the U.S. economic and political outlook this year, according to the Economist Intelligence Unit’s latest monthly insights report.

The EIU’s analysis explores these economic and political implications to provide an outlook for 2022.

See the gallery for five areas in which the conflict is already making itself felt in the U.S. and how it will do so in the long term.

Michael S. Fischer

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