How is the war affecting energy and trade? - IMF Analysis: Concerns about food prices are rising
While war can shape the global economy in different ways, all paths lead to higher prices and slower growth. According to a recent study by the International Monetary Fund (IMF), a short conflict could push up oil and gas prices before markets adjust, while a long conflict could keep energy expensive and strain countries that rely on imports.
The closure of the Strait of Hormuz and damage to regional infrastructure have caused the biggest disruption to the global oil market in its history, according to the International Energy Agency. For fuel-importing economies, the effect is that of a large and unexpected tax on income.
The multi-regional impact is evident. Energy-importing economies in Africa, the Middle East, and Latin America are feeling the pressure from higher import bills, in addition to already limited fiscal space and external shock absorbers.
In Europe, the shock is reviving the specter of a 2021-22 gas crisis, with countries such as Italy and the United Kingdom particularly exposed by their reliance on gas power, while France and Spain are relatively protected by their greater nuclear and renewable capacity.
The war is also reshaping supply chains for non-energy and critical inputs. The rerouting of tankers and container ships increases freight and insurance costs and extends delivery times.
In addition to higher commodity prices, countries, companies and consumers are already grappling with the effects of these supply chain disruptions. With the disruption of fertilizer shipments, about a third of which pass through the Strait of Hormuz, concerns about food prices are growing.
People in low-income countries are most vulnerable when prices rise, because food accounts for an average of about 36% of consumption, compared with 20% in emerging market economies and 9% in developed economies. This makes any increase in fertilizer and food prices not only an economic problem but also a socio-political one, especially where fiscal resources to cushion the blow are limited. If high energy and food prices persist, they will fuel inflation worldwide.
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