Russia’s ongoing invasion of Ukraine has killed thousands of civilians and devastated the nation. The conflict has also had a wide-ranging impact on international markets, with sanctions driving up the price of oil and diverting international air travel, as well as increasing the uncertainty of a swift post-COVID economic recovery. Facing the prospect of further escalation and growing disruption, the public and private sector is working to predict and price in further impacts of the conflict, with one consultancy predicting a recession as a potential worst-case scenario.
McKinsey and Company’s (McKinsey) report, “War in Ukraine: Lives and livelihoods, lost and disrupted” explores a variety of possible outcomes depending on the duration and severity of the conflict, as well as the impact of government sanctions, consumer boycotts, and widely-reported business withdrawals from Russia. The analysis includes three levels of disruption – contained, extended, and severe – and three government policy responses –restrained, moderate, and robust. The firm’s model does not include the conflict extending beyond Russia and Ukraine’s respective borders, giving even the worst-case scenario a seemingly optimistic perspective.
The ‘best case’ scenarios involve a quickly-negotiated cease-fire, return of refugees, market stabilization, and a return to normal prices. The firm predicts that worse levels of disruption would entail an escalated and long-running war, with a substantial worsening of the refugee crisis and energy, food, and commodity prices continuing an upward spiral over time.
The worst-case scenario describes a severe disruption and a moderate policy response, resulting in a recession in the eurozone and the U.S. In that scenario, a lengthy conflict would result in further sanctions against Russia, leading to a shutdown of oil and gas exports, causing prices to skyrocket, and inflation to spike. Combined with existing low levels of business and consumer confidence, the scenarios predict the eurozone would likely fall into a recession in 2022 and 2023. In those scenarios, growth would drop to -0.5% across both years, with GDP growth returning 2024 despite the low-intensity conflict continuing.
While war is rarely predictable, the report provides data-driven market insights that savvy businesses may use to prepare to weather the crisis, however long it continues.