Surveillance: Ukraine War's Economic Impact

back to food security as well. We heard from the Agricultural Minister of Ukraine this morning. Ukraine said the following the situation with Ukraine's food is quote under control. They went through the stockpiles, things like wheat, things like corn, said, wheat stockpiles were sufficient for two years. Corn stockpiles sufficient for one and a half years. Let's talk about food security,

domestic and international. And really one of the best guests I can think of for insight into the inner work into the Ukrainian economy, the former Ukraine finance minister naturally to Risto, naturally fantastic to catch up with you again. You are perfectly positioned to run us through this help us understand the threats of both domestic food insecurity and international food insecurity as well. Well. Thank you very much

for having me. I think on the domestic side, what they said about the stocks is very true, and I don't think it's the issue of whether or not there's

sufficient stocks. I think the challenges right now food security, in particular in the cities that are being besieged because there's no way to get food into the cities and those that are still functional key of for the for example, the capital are having trouble getting bakeries to function, and so the challenges taking those stocks and translating that into food, I think, usable food for the population. With regard to

the international community, that's very different. Everything depends on whether or not farmers are able and willing to go out and farm and to plant this spring, and as you've seen, Ukrainian farmers have a lot of other things on their minds,

including taking some of the tanks. So it's it's a question of how much of the arable land is going to be safe without bombs flying overhead to plant, and if not, I think you're going to see a serious food problem globally in particular in Northern Africa and the

Middle East. Meanwhile, Nat, only or earlier this morning, we were speaking with our own Maria Todeo, who said that in two weeks Russia single handedly destroyed Ukraine's economy, and I wonder how long how lasting that destruction will be, which speaks directly to the food security. How soon after the conflict ends, could those farmers get back out, could the land be salvageable? Well, if we missed this farm this planting season, we're not talking about planting again until

we have it. We have a minimal winter season and then it's next spring. So really the time is the next two months for for planting. And if we miss this season, then I think you're going to see global food prices rise substantially. That's the damage to the Ukrainian economy. When it comes to the Russian economy, we know already a lot of damage has been done by sanctions already put into place. From your perspective, Natalie, how much powder

is still in the keg? How far away is the West from having exhausted all of its options on that front? Very far from having exhausted our options. We've been pretty timid. There's been a couple of key sanctions that have had an effect, meeting the freezing of the reserves of the Central Bank of Russia which has affected their ability to support the exchange rate, and then the devaluation of the of the ruble has caused bank runs and so on. But I think we're not yet seeing the rest of

the banking system frozen. So we do not have full blocking sanctions even against his bare Bank and VTV, the two largest in the system, um those only have minimal sanctions. And then the rest of the state owned banks are still unsanctioned, state owned energy companies unsanctioned. We still haven't sanctioned the state owned logistics companies, the state owned transportation companies.

I think there's still quite a bit to do. We've done in the United States and in a ban on oil imports, but that really is the limit of it. That and some increased tariffs in Canada. We really need everyone in Europe to join in the at a minimum increase in tariffs on Russian imports, if not a ban on certain in particular oil and gas. So there are still a wide variety of sanctions that haven't been used. And frankly speaking, I think we've been too timid. We

need to move much more quickly. And that seems to be the message from Vladimir's Lenski this morning in Germany. He was saying, you guys need to stop with some of these gas payments, although it does become very difficult because they rely on those pipelines for their lifelines and for costs to be with made within control. What are you looking for in the next couple of days, the next couple of weeks to try to bring this to

a close. First and foremost, it's delivery, urgent delivery of those military supplies, some of which were promised by President Biden yesterday, in particular air defense. It is the bombing and the missiles that is causing the most tremendous amount of death. What you saw with the bombing of a theater in Mariopol in the southeastern part of the country, um with three hundred to five hundred civilians inside, that that can't be stopped, not with but by the very

brave Ukrainian armed forces on the ground. We need the air defense, So number one, increase the military support urgently to Ukraine so they can defend themselves. Number Two, I would ask for blocking sanctions on the state owned banks, blocking sanctions meaning no more doing business with Russian state

owned banks. If a few existing contracts need to be carved out in Europe because of the energy contracts, then find a way to permit by license in individual contract, but stop and cease doing business with Russia Natally, can I say thank you. We had important conversations eight years ago and unfortunately we're having those conversations again. Thank you very much for being with us. Naturally to Risco, the former UK rain finance minister joined US now Director and

Chief Economies. He likes Mador G. P. Kayley, as you know from the O. E. C. D. Lawrence, great to catch up. We've got two sharks. We saw it in the ECB's forecast. We saw in the fetes as well. They've had to raise their inflation outlook. They've had to drop their projections for growth. It's a difficult position for policymakers, fiscal policymakers to be in Lawrence, what's your recommendation for how fiscal policymakers should react to the higher energy bills

across Europe. Well, actually, as you're saying, this is a moment for fiscal policy makers. What we are seeing now is a hit too pull to consumers of energy and a sor of food UM, and that needs to be addressed with fiscal measures were recommended means targeted, temporary measure to actually soothe the bill for the poorest household, lower

income and lower mint income class people. And that will also actually help inflation to be kept in check by lowering the wage price power that would come out of inflation bursting without any physical support. So right now, Laurence, I was looking at your projection and there was a careful categorization of the market response slowing growth materially and pushing up consumer prices. Markets seem to be starting to move on, and assume that there's going to be some

quick resolution to this conflict, at least relatively speaking. Is that Does that mean that the ramifications economically, however horrific, the humanitarian aspect of this is would be really dampened because the markets have moved on. So I think we should refrain from any hasty conclusion. The situation is very volatile. It evolves by the day UM and we are seeing this not only with the humanitarian situation, which continue to be a flow of refugees, but also in prices. Right.

So market job is to anticipate what's going to happen in the future, and as the situation involves, this expectation will move. So I think one thing, one known thing, is that we will get a lot more volatility ahead of airs as the situation evolves. Um. And the unknown is you know in which direction and how far that can go? Do you think, Lawrence, that the economy can handle in the United States the idea of a hawkish bed of more tightening in the face of the inflationary impulse.

So we are not starting in the vacuum right prior to the conflict, and the United States economy was doing super well, very strong recovery, very low and employment rate and quite broad based and high inflation. So in that circumstances, it's actually the fair you know, it's moving in the

direction that it should. Now these very high energy and food prices mean that some consumers households will be hurt, and those households they need to be supported because for some of them, the energy and would be thirty of their purchasing basket um. And if there is this fiscal targeted support measure for these people, perhaps fiscal consolidation in the US will be delayed a little, but that will also allow the monetary policy to and its course and

do its job. Speaking of monetary policy specifically for the Federal Reserve, what was absent from its statement yesterday was mentioned of COVID nineteen. It was only actually mentioned in the context of the inflationary impulse because of the supply side challenges the pandemic presented. Has the world moved on from the pandemic as an economic risk going forward, So

I think the pandemic remains an economic risk. You can they see that from China with these zero COVID policies where some cities are being shut down and many of the city's manufacturers their manufacturing. They contribute to the global supply chain. Um, there's also some technological products. So I don't think we can we can disregard this reek why the pandemics. We steer with US and in many countries, and this steer has impact unsupplied chain and under tension

the inflationary retention as well. European consumers are going to be in such a tough spot through the next few months. Lawrence, Thank you. Lawrence burn the of the a c D. Let's get to Sarah hum In, the head of Europe and America's Researchers Standard chatted Sarah, can we start with the Bank of England, work our way through the e c B and get to the Federal Reserve eventually? Can you see inflation at around eight percent in the second corner?

In the Bank of England not being more active through this great hiking cycle through this year, well, it looks as if they are losing their nerve. And of course since the last meeting we had a massive change in circumstances which really risks the stabsflation. In the UK, we have rising inflation. Inflation eight percent looks likely could even

go to double digits later this year. And although the data that we've had so far for the UK economy have been pretty positive for January and February UM, there is a clear concern about the squeeze in living standards that is to come. We are seeing inflation essentially at double the pace of wage increases and that's not good

news for the economy. I think also the comments on the supply side constraints UM suggest that you know, there's more consciousness that these costs coming through are externally generated and that they potentially pose more of a risk for growth over the over the medium term, So it's possible. I mean, we're exteptly expecting another rate hike in May,

but we think that will be it. We think by that stage there will be a clear sign of slowdown in the economy and that the bankoming the will to pause. So is there a message in this for the Federal Reserve that basically, if the inflation is coming from something other than monetary policy, raising reeds isn't necessarily the answer. Is the Fed just dealing with a completely different set of issues that also is a bit more driven by

monetary policy. I think there are differences. Um, the UK economy is more exposed to the EU economy, and that in turn is more exposed to the downside risks from the Russia Ukraine War, so we're likely to see further downgrades to your EU growth potentially to UK growth, whereas for the US they are insulated to an extent. Similarly, from an energy point of view, obviously, you know the gasoline prices rising and that's a negative for US consumers, but it's less of a case than it is in Europe.

I mean, we are still quite nervous about the US outlook. We would only you know, we're expecting another three rate heights this year from the FED, but we think that those rate heights will be front loaded and that when we get to the summertime that there will be clear signs of a slowdown. So I think it's the same phenomenon that's facing not just the UK, not just the EU, but also the US, and it just may be a matter of that impact being more delayed in the US.

Sarah Human of Standard Charlotte, How Big wire that rate and Crispy though fifty going to do that all over again with Ja Bryce and chief Economist A wils Fargo, Jake and Hardy. Wait, Jay, let's start here with the question we've asked all morning. Can you raise interest rates without unemployment climbing? Sure you can, We've seen that happen before.

Can you move to a restrictive stance, tighten financial conditions and do all of this reduced the banners sheet of eighteen months and get yourself back to somewhere close to three without unemployment rising, Jay, that's a big task in it, you know, John, It is a big task. I mean, the defense isn't a very tricky sort of position right now.

But you know, if you go back to the nineties, and I know that Sam sounds like ancient history to some folds, but you know, in between, the Fed did raise rates by like three basis points UM, and you know that was they were throwing in fifty basis point rate hikes, are throwing a seventy basis point rate hikes. There was concerned about inflation at the time. The economy um hit a little bit of a rough patch for

early in but they were able to pull it off. Now, I'm not being a polly and I'm not saying they're necessarily going to pull it off again this time, but it has happened before. So, Jay, are you saying that the bond market is perhaps a little bit too gloomy And I can't believe that I'm saying this, but a little bit too gloomy with the flattening in the yield curve, and as people realize that the economy is perhaps in certain sectors, particularly the consumer area, less sensitive to rate hikes,

that it can withstand vastly more than they're expecting. Well, so, yeah, so if you look at the two tens you know, there's the spread between the two year note and the ten year note right now, it's about twenty basis points ourselves. You know, as long as that doesn't invert significantly, I'm not really all that worried about it. And again, if you go back to previous tightening cycles, you get to a very very flat um yield curve at times. So

it's certainly something that we're keeping an eye on. And more generally, you look at financial conditions right now, if you look at corporate bond spreads over treasuries, and you know, the stock market has come off, so in general, we have had a financial fightening that's going on, and with the Fed raising rains here it's as I said, you know when we first started here, it's gonna be tricky

for the Fed. The pool that's went on. Jay, do agree with economists who think that because there has not been even more of a reaction risk assets, the FED will be even more aggressive in May with the beginning of their balance sheet shrinkage, as well as potentially even a fifty basis rate hike. You know, I don't know if it's all up to just you know, risk assets. In general, I think it's lots going to depend upon

you know, the data. The FED is in data dependency mode right now, right and the world can change between here and May, and so you know, we'll see what happens. I mean, our our view is that the FED will announced balance sheet reduction starting in June. Who knows, maybe it gets pulled up to May here, but it's it's coming, assuming you know, something that the economy doesn't get completely

Israel derailed here. I think they'll start it out slow in terms of the balance sheet reduction, and then they'll just kind of pick up muks like it did the last time I round as well well, Jay, when you talk about data dependency for the FED, Chairman Pale seemed to indicate yesterday that getting inflation under control price stability

is a prerequisite for everything else in their mandates. So when we talk about data dependency, are we essentially exclusively talking about inflation data, about CPI, about pc no. I mean, I think those those you know, the inflation data, I think are the prime things that the FED is looking at right now, as long as long along with inflation expectations, you know, measured both in the bond market and measured

by the University of Michigan. Sentiments are may but they're also they look at everything that's coming in and so you know, maybe labor market data takes a little bit of a vac SAT right now, but it's not like they're going to completely ignore that. And if we see signs that the economy is really decelerating in the coming months, I think the messaging out of DEFEND is okay, maybe we're going to start to back at off here on

that deceleration. JA. Do you anticipate that, especially given the uncertainties around the war in Ukraine or does that ripple effect not really hit the US as hard as it may Europe. So I think it hits Europe harder um than than it does here in the United States. Um, you know there's more. Uh. You look at the United States, we have very very little direct exposure to Russia, both financially as well as economic. Europe as much more exposure

as well. So the primary thing that Russia is causing here in the United States is higher oil prices or hired gas prices, and that's something that's leading to a deceleration here. Outside of that, again, there's very very few linkages between the US economy and the Russian or Ukrainian economy to lead to a big deceleration and get outside of gasoline prices just quickly. One rate hike in twose tents is already about twenty basis points. We're already seeing

some form of inversion seven year yeards above tens. We saw that with five a little bit earlier on this morning, threes threatening to do the same. It's the Fed comfortable to push through that, do you think ja this time around, given where inflation is, given where the focus is this time around. Well, so if you look at two, so you know what's priced into the bond market. Seven rate hikes. I mean, that's what the That's what the dot plot. So seven rate hikes this year, that's what the dot

plot said yesterday. So in theory, if the Fed does seven rate hikes this this year, and that should be all completely priced in in theory, that shouldn't cause the young curve too impked. But you know, if if the market starts to anticipate even more aggressive tightening or more tightening out in three, then that's potentially where you can get duran version. Jay. Thank you, sir Jay Bryson of

who ELS. We appreciate it. Let's get to Sarah Human, the head of Europe and America's researchers Standard shouted, Sarah, can we start with the Bank of England, work our way through the ECB and get to the Federal Reserve eventually? Can you see inflation at around eight percent in the second corner in the Bank of England not being more active through this great hikey cycle through this year, Well,

it looks as if they are losing their nerve. And of course since the last meeting we've had a massive change in circumstances which really risks the stabsflation. In the UK, we have rising inflation. Inflation eight percent looks like he could even go to double digits later this year. And although the data that we've had so far for the UK economy have been pretty positive for January and February UM, there is a clear concern about the squeeze in living

standards that is to come. We are seeing inflation essentially at double the pace of wage increases and that's not good news for the economy. I think also the comments on the supply side constraints UM suggest that you know, there's more consciousness that these costs coming through are externally generated and that they potentially pose more of a risk for growth over the over the medium term, So it's possible. I mean, we're extept re expecting another rate hike in May,

but we think that will be it. We think by that stage there will be a clear sign of slowdown in the economy and that the bankening that will need to pause. So is there a message in this for the Federal Reserve that basically, if the inflation is coming from something other than monetary policy, raising reeds isn't necessarily the answer is the Fed just dealing with a completely different set of issues that also is a bit more

driven by monetary policy. I think there are differences. Um, the UK economy is more exposed to the EU economy, and that in turn is more exposed to the downside risks from the Russia Ukraine War, so we're likely to see further downgrades to your EU growth potentially to UK growth,

whereas for the US they are insulated to an extent. Similarly, from an energy point of view, obviously, you know the gasoline prices rising and that's a negative for US consumers, but it's less of a case than it is in Europe. I mean, we are still quite nervous about the US outlook. We would only you know, we're expecting another three rate heights this year from the FED, but we think that those rate heights will be front loaded and that when we get to the summertime that there will be clear

signs of a slowdown. So I think it's the same phenomenon that's facing not just the UK, not just the EU, but also the US, and it just may be a matter of that impact being more delayed in the US. Sarah human Standard chatted. This is the Bloomberg Surveillance Podcast.

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