Rising Uncertainty From Ukraine War, A Bad Sign For Economic Output: IMF

"As the war in Ukraine unfolds, global uncertainty has surged, according to the latest reading of the World Uncertainty Index — a quarterly measure across 143 countries. This increase is a bad sign for growth," wrote the IMF. 

"Our research finds that such increases foreshadow significant output declines. Based on our estimates, the rise in uncertainty in the first quarter could be enough to reduce full-year global growth by up to 0.35 percentage point," added the blog post.

The already disrupted global supply chains led by the pandemic have been distorted further by the ongoing Russia-Ukraine conflict, with prices of energy and commodities rising sharply.

Indeed, commodity prices have shot up since Russia invaded Ukraine late in February, the most significant attack on a European state since World War Two. Moscow calls it "a special operation in Ukraine."

At one point, the benchmark Brent crude prices surged to multi-decade highs of near $140 per barrel. While crude prices have eased in recent weeks, they are still above $100 a barrel.

That surge in crude prices and the pass-through of commodities' costs spike has pushed already-high inflation even further. And the surge in inflation has set major central banks on a tighter monetary policy path even as world economies are at different stages of recovery from the pandemic. 

The uneven recovery notwithstanding, now major central banks are poised to tighten policy aggressively to tame spiralling inflation, which is expected to hurt economic growth and activity.

"While global uncertainty reached unprecedented levels with the initial coronavirus outbreak, it then fell sharply. However, the World Uncertainty Index rebounded in the first quarter, reaching levels close to what was seen around the September 11, 2001, attacks in the United States and the United Kingdom's 2016 vote to leave the European Union," the IMF noted.

The blog post referring to the uncertainty index said that despite the recent jump, the current reading is still half the level at the onset of the pandemic.

That could come down to three reasons: COVID-19 was a global event, hitting almost every economy and health system. The outbreak came amid already elevated uncertainty due to Brexit and US-China trade tensions. The index may yet rise to a new peak in uncertainty associated with the war in Ukraine, added the IMF.