What can we expect from the global economy this summer?

Energy prices affect everything, so expect the consumer price index in the UK to go to at least 8 per cent, while the retail price index may reach double figures, writes Hamish McRae

Shell has defended its ‘difficult’ decision to keep buying Russian oil (Getty Images)

This will, alas, get worse, perhaps much worse, before it gets better. This applies to the military and humanitarian situation in Ukraine, but it also applies to the impact of the conflict on the world economy.

Every day that passes deepens the economic rift between Russia and the rest of the world. Visa and Mastercard pulling out is just one more step along the road. We are reaching a situation where any business that seeks to do business in or with Russia will find the rest of its activities around the world facing a boycott.

To see the scale of what is happening, start with the statement last week from Apple. It said that it would “pause” sales of iPhones and all other products within Russia and stop all exports. Pause is a weak word, but ask yourself this: what would be the circumstances whereby Apple might end that pause? There will eventually be a ceasefire. But suppose a puppet regime is established and Ukraine sets up a government in exile. Suppose the present Russian regime survives. It is hard to see how Apple could resume sales until an independent government is established in Ukraine, and there is radical change in Moscow.

The same logic applies to all the other western companies that have pulled out. Russia is not an important enough market – an economy the size of Spain – to risk alienating customers everywhere else in the world.

But what about buying Russian produce? Here the rupture may be slower. Europe has allowed itself to become overly dependent on Russian gas and oil. Shell has defended its “difficult” decision to keep buying Russian oil, arguing that it is hard to replace Russia as a supplier in the short term. But I wonder how long such an attitude can survive. We will have to see how quickly Europe manages to wean itself off Russian gas, but the pressure to do so will be enormous.

Some Russian oil and gas will reach the world market. There will always be buyers somewhere. Russia is setting up alternative payment mechanisms. You can always find a way of getting paid, especially in a world of cryptocurrencies. There is always gold. But from a global perspective, we are moving towards a world economy that pretty much cuts off Russia for the foreseeable future. What will this mean? There are such massive uncertainties that this cannot be more than a sketch, but let’s try.

Short-term, and that means this summer, there will be a surge in inflation. Energy prices affect everything, so expect the consumer price index in the UK to go to at least 8 per cent, while the retail price index may reach double figures. The government will try and find ways of mitigating the worst of the impact, as will all governments in the west. But there is a limit to what they can do.

A further concern will be what happens to food prices. The price of fertiliser has soared, increasing agricultural costs everywhere. In addition, Russia is the world’s largest exporter of wheat, and Ukraine is in the top five. Higher food prices hit the poorest hardest, because a larger proportion of their budgets go on food.

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Next, expect financial disruption. There has been remarkably little so far, but the problem here is that it is hard to identify the weak spots until they come under stress. What if house prices fall by 20 per cent? Or interest rates go to 6 per cent? I bet none of the central banks planned for the cutting of Russian banks out of the Swift payments system, or the freezing of the country’s foreign exchange reserves. Some banks may have to be rescued. The market fallout may increase, putting further strains on the financial system.

A further question this summer will be what to do about monetary policy. Do the central banks keep interest rates down despite rising inflation, because they are worried about financial disruption? Or do they press on? My guess is that the US and UK will indeed increase interest rates this month, but maybe the summer will see them slow the increases they had previously planned.

All this is profoundly dispiriting, but I can see two bright spots among the clouds. One is that we will learn to conserve energy as well as developing alternative supplies. The world has experience of oil shocks. Every time the oil price shoots up we find ways of using less. Then the price goes down and we slither back to our old ways.

The other is that the world economy is expanding fast. These dreadful events have hit growth, but we were growing strongly before it happened. So the world has a difficult summer, but the prospect of well-balanced growth ahead. This, of course, is the economic outlook. I wish I could be equally positive about global politics.