Chief Economist's Corner: The war in Ukraine hits the economy and leads to a new world order

It is enormously difficult to make a quantitative estimate of the economic consequences of the war. But a number of central banks and institutions have set up scenarios for developments. The OECD assesses that economic growth in the Euro area will be reduced by nearly 1½% points compared to a situation without war, and the ECB’s calculations suggest broadly the same result. In Denmark, the scenarios set up by the Danish central bank and the government unambiguously point to weaker growth, higher unemployment and higher inflation than in the initial situation. But neither of them predicts a major and long-lasting economic downturn as a result of the war.

This is, obviously, good news. But don’t forget that these are hypothetical scenarios simulated using an economic model which is basically not designed to predict developments in a war situation. This means that the uncertainty associated with the calculations is significantly greater than normal. Things may turn out better than anticipated if the fighting is suspended soon. But they may also turn out far worse if the war drags on and in a worst-case scenario spreads beyond Ukraine.

Yet it also means that there is every reason to keep all doors open for easing economic policy if we face a new recession. And as most of the world’s central banks are busy fighting inflation, which is far too high, by tightening monetary policy, it mainly comes down to fiscal policy.

Many countries are starting to support households’ purchasing power, for example by cutting VAT and duties on energy, increasing tax deductions for transport, compensating businesses for energy bills or even capping prices of gas and electricity. So far the Danish government has only adopted the so-called heating package, providing heating subsidies for low-income households, but the tools are known if additional measures are required.

At the same time defence budgets are being increased markedly in the Western countries, and the ground-breaking decision to make the EU independent of Russian energy means that the green transition will be accelerated. That will also boost demand and create jobs.

While there is considerable uncertainty over the economic consequences of the war in Ukraine – apart from higher inflation and lower growth short term – the war will clearly change some of the fundamental structures in society. Security policy has become of paramount importance, and this will be reflected in the composition of demand for goods and services over the coming years. And there is no doubt that the relationship – and thus also economic relations – with Russia will remain at freezing point for many years, even if a peace agreement is reached soon. And although there will not be a new Cold War, based on a bipolar balance of power as we knew it from 1945 until 1991, there is hardly any doubt that we are again facing a time of unrest and upheaval in the global world order. Which side in the current conflict China will choose to support can be completely decisive for all of us many years ahead.