Beyond the suffering and humanitarian crisis from Russia’s invasion of Ukraine, the outcome of the unfolding events in Eastern Europe, along with continued concerns about COVID-19, appear to be considerably reshaping the global economy and its structure.

Although assessment is still ongoing, global economic growth will be impacted negatively due to the knock-on effect of the prevailing geo-political situation and inflationary pressure exerted by skyrocketing energy and commodity prices.

Impacts are seen flowing through additional factors, mainly in the form of supply chain disruptions and labor shortages in different parts of the world, having spill-over effects in the service sector as well. A sustained rise in inflation is anticipated, resulting in rising interest rates and, hence, slowing investment.

In this respect, the global economic growth dynamic could also be challenged by high sovereign debt levels that could cause a considerable burden on the fiscal health of many economies. Factors that could counterbalance the downward trend could come in the form of additional fiscal stimulus measures, especially in the western economies and China.

While the year started on relatively solid underlying footing, the latest events in Eastern Europe may derail the recovery. Some slowing impact of the spread of the COVID-19 Omicron variant became visible at the beginning of the year in the US, the Euro-zone, Japan, and China. And while COVID-19 was the overarching topic for the past two years, the Ukrainian crisis will shape the growth pattern in 2022 to a large extent. The conflict has impacted other areas as well, including capital markets, which experienced large swings in recent weeks; transportation, and supply chains; and global financial tightening, which has a dampening effect on the global growth dynamic.

Consequently, representatives of the major central banks have reiterated their general willingness to continue to taper the unprecedented monetary stimulus measures undertaken in response to the COVID-19 pandemic. Beyond global spill-over effect, countries with direct trade, tourism, and financial exposures are feeling additional pressures. Economies reliant on oil imports are staring at wider fiscal and trade deficits and more inflation pressure, though some exporters such as those in the Middle East and Africa will benefit from higher prices. In the long term, the war may fundamentally alter the global economic and geopolitical order should energy trade shift; supply chains reconfigure; payment networks fragment, and countries rethink reserve currency holdings. Increased geopolitical tension further raises risks of economic fragmentation, especially for trade and technology.

The economic recovery continues, though the pace of the recovery has slowed. Notably, IMF’s global forecast was lowered in January 2022 to 4.4 percent, from an October projection of 4.9 percent, amid reduced growth prospects for the two largest economies – United States and China.

The IMF is set to update its projections in April 2022 and is expected to set the world economy forecast less than the 4.4% previously anticipated. Meanwhile, inflation has been higher than expected in many economies, while financial markets remain volatile as geopolitical tensions have increased. It is very challenging to comprehensively capture the near-term global economic expectations.

However, there are some trends that seem to be relatively clear now. The rest of the world will face numerous spill-over effects from the conflict. First, the consequent strong rise in commodity prices is further fuelling global inflation, which was already at a high level, and food inflation especially will likely be an existential challenge for low-income and less-developed economies.