A year of war in Ukraine: an economic summary

Friday marks one year since the start of the Russian invasion of Ukraine. At the time, the conflict was the source of many economic shocks. Of course, the war is the most painful and dramatic for Ukrainians. However, its economic effects affected the whole world. Poland is one of the countries that feel the economic effects of the war the most.

The impact of the war on the increase in prices in the world

The war caused a shock increase in prices oil i natural gas and other commodities, which contributed to the increase in global inflation. This mechanism can be clearly seen on the example of natural gas. The first months of the conflict caused a sharp jump in the price of this raw material, fueled by the fear of a harsh winter and shortages in supplies. In Poland, this resulted in stopping the production of artificial fertilizers and limiting production by some companies. After that, prices began to fall and from the summer of 2022 to now, they have already fallen by 85 percent. If we convert the price of gas into the energy that can be produced from it, it turns out that the costs of MWh from natural gas and crude oil are currently similar and cost about EUR 50. However, it cannot be overlooked that the current price of TTF natural gas is still three times higher than the level from 2020 and is a serious factor hampering economic growth in Poland and many other countries. However, the high price of gas also encourages entrepreneurs to innovate and look for alternative technologies and energy sources. 

The influx of Ukrainian refugees was also of great economic importance for Poland. Up to 8 million of them could have passed through our country, of which about 2 million stayed for longer. On the one hand, this is additional expenses for the Polish budget, but on the other, it is an opportunity to support the economy, which in recent years has been struggling with very low unemployment and lack of work (especially in large cities). Probably some of the refugees who are currently staying in Poland will stay permanently, which may improve Poland's demographic situation in the coming years. It will also increase budget revenues and reduce the deficit of the pension system. The longer the armed conflict in Ukraine lasts, the greater the likelihood that some refugees will make their lives in other countries and will not be ready to return to Ukraine. 

Increased uncertainty in the markets

For investors, the conflict in Ukraine is a source of additional shocks and increased uncertainty. According to the study Individual Investor Pulse eToro in the 4th quarter of 2023, 17 percent. of Polish investors believed that this conflict was the biggest external threat to their portfolios (33% of respondents pointed to rising inflation). Recently, we have seen an increase in concerns about war, after their gradual decline in Q2 and Q3 2023.

However, the impact of the conflict on global markets is limited and occurs mainly through the impact channel on inflation (which has now started to fall in most countries of the world). If we follow the quotes VIX volatility index (sometimes called the "fear index"), it increased to 35 after the invasion, which is a large increase, but much lower than in the first days of the pandemic. Since the beginning of December, the VIX has been hovering around 20 points, which indicates that the level of uncertainty in the markets has decreased. 

The conflict greatly affects local stock exchanges. This is clearly visible in the valuation of the index WIG-UKRAINE, which consists of 8 shares of Ukrainian companies listed in Warsaw (from the agricultural and mining industries). The index has lost 50% in the last year. its value.

 The defense industry is booming

The war also caused a significant increase in global demand for products defense industryand other products that can be used in war. We are seeing an increase in demand for civilian products such as power generators, pick-up trucks and drones. The war will also result in an increase in defense spending in Europe in the coming years. Many countries are likely to increase their military spending to at least 2% of GDP sooner. GDP. And some, like Poland, will probably exceed this level. 

 The year of war in Ukraine and the change in GDP

Finally, it is worth looking at how the war affected GDP in individual countries. According to data from the Ukrainian Ministry of Economics, the country's GDP shrank by 2022 percent in 30,4. world Bank estimates that Russia's GDP in 2022 decreased by 3,5 percent as a result of the sanctions. This is much less than previously predicted. And the Russian economy turned out to be short-term immune to the effects of sanctions. However, it seems that in the medium and long term their effects may be much more severe. 

About the author

Pawel Majtkowski - analyst eToro on the Polish market, which shares its weekly commentary on the latest stock market information. Paweł is a recognized expert on financial markets with extensive experience as an analyst in financial institutions. He is also one of the most cited experts in the field of economy and financial markets in Poland. He graduated from law studies at the University of Warsaw. He is also the author of many publications in the field of investing, personal finance and economy.