The Russia-Ukraine conflict has upended commodity markets, altering global trade, production and consumption patterns that will keep food and energy prices at “historically high levels” until 2024, the World Bank has said.
The surge in energy prices over the past two years has been the largest since the 1973 oil crisis, the Washington-based lender said in its latest commodity markets outlook.
Meanwhile, the increase in the prices of food commodities — of which Russia and Ukraine are large producers — and fertilisers, which rely on natural gas as a production input, have been the largest since 2008.
“Overall, this amounts to the largest commodity shock we have experienced since the 1970s … the shock is being aggravated by a surge in restrictions in trade of food, fuel and fertilisers,” said Indermit Gill, World Bank vice president for equitable growth, finance and institutions.
Because of the war-related trade and production disruptions, the price of Brent — the global benchmark for two thirds of the world's oil — is expected to average $100 a barrel this year, its highest level since 2013, after increasing by more than 40 per cent annually, the World Bank said.
However, prices are expected to moderate to $92 next year — well above the five-year average of $60 a barrel.
Energy prices are expected to rise more than 50 per cent this year before easing in 2023 and 2024. Non-energy prices, including agriculture and metals, are projected to increase by about 20 per cent in 2022 before moderating in the coming years.
Commodity prices are projected to remain well above the most recent five-year average. In the event of a prolonged war or additional sanctions on Russia, prices could be even higher and more volatile than currently projected, the report said.
“These developments have started to raise the spectre of stagflation. Policymakers should take every opportunity to increase economic growth at home and avoid actions that will bring harm to the global economy,” Mr Gill said.
In economics, stagflation is a term for when inflation is high and economic growth is sluggish. Unemployment often rises sharply.
The International Monetary Fund expects inflation to hit 5.7 per cent in advanced economies and 8.7 per cent in emerging market and developing economies, respectively, this year.
Inflation in 2023 is projected at 2.5 per cent for advanced economies and 6.5 per cent for emerging markets and developing states.
Commodity markets are experiencing one of the largest supply shocks in decades because of the war in Ukraine, said Ayhan Kose, director of the World Bank’s Prospects Group that produces the outlook.
“The resulting increase in food and energy prices is taking a significant human and economic toll … it will likely stall progress in reducing poverty. Higher commodity prices exacerbate already elevated inflationary pressures around the world,” Mr Kose said.
Wheat prices are expected to jump more than 40 per cent, reaching a record high in nominal terms this year, putting pressure on developing economies that rely on wheat imports, especially from Russia and Ukraine, the World Bank said.
Metal prices are forecast to increase 16 per cent in 2022 before easing in 2023. However, they will remain at elevated levels.
“Commodity markets are under tremendous pressure, with some commodity prices reaching all-time highs in nominal terms,” said John Baffes, a senior economist in the Prospects Group.
“This will have lasting knock-on effects. The sharp rise in input prices, such as energy and fertilisers, could lead to a reduction in food production, particularly in developing economies,” he said.
The report said the war’s impact could be last longer than previous shocks for at least two reasons.
First, there is less room to substitute the most affected energy commodities for other fossil fuels because price increases have been broad-based across all fuels.
Second, the increase in the prices of some commodities is also driving up other prices. For example, high natural gas prices have raised the cost of fertiliser, making agricultural products more expensive.
The World Bank urged policymakers to act promptly to minimise the risk of harm to their citizens and to the global economy. It called for safety net programmes such as cash transfers, school-feeding programmes and public work initiatives, rather than food and fuel subsidies.