The conflict has sparked a sanctions regime against Russia and left financial markets reeling
It’s a development described by Bank of Canada governor Tiff Macklem as injecting “new uncertainty” into the global economy: the Russian invasion of Ukraine on February 24, a move that sparked a wave of international sanctions against Russia and left financial markets reeling.
The likely global economic impact of that conflict remains difficult to predict, mainly because its outcome – and longevity – are so uncertain. Still, immediate spikes in energy prices and new global supply chain snarls have already been registered, exacerbating a problem that’s existed throughout the COVID-19 pandemic.
Canada has joined a host of other nations in cracking down on Russia’s aggression, imposing a wide-ranging sanctions program aimed at crippling the country’s economy and imperilling its advance into Ukraine. But just how significant an impact is the crisis likely to have on the Canadian economy?
That’s a question that largely depends on what scenario unfolds in Ukraine, according to CIBC World Markets’ deputy chief economist Benjamin Tal (pictured top), who told Canadian Mortgage Professional that Canada was more removed economically from the crisis than other major world players.
“If there is some sort of continued fighting and Russia takes over, it’s a major event for Russia and for Ukraine. It’s not a major event for Canada, economically speaking,” he said.
“The number one impact is on Russia and Ukraine because of sanctions and what’s happening to Ukraine. Then there are Germany and France, once removed. We are twice removed.”
That means that the impact of a prolonged conflict on economic growth and GDP in Canada would not necessarily be very large, Tal said – although it could pose a significant inflationary threat.
The Bank of Canada has referenced the Russia-Ukraine crisis in its last two policy rate announcements, with its most recent statement describing the unfolding chaos as a “major new source of uncertainty” and noting rising oil and commodity prices in addition to the potential for further inflation.
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“Negative impacts on confidence and new supply disruptions could weigh on global growth,” the announcement said. “Financial market volatility has increased. The situation remains fluid and we are following events closely.”
Markets are currently pricing in multiple new central bank rate increases throughout 2022 – and Tal said the crisis in Ukraine was unlikely to deter the Bank from its current course on rate hikes, unless a significant development occurs such as a cyberattack on Canada.
Federal finance minister Chrystia Freeland has been candid about the possible effect the sanctions targeted at Russia could have on the Canadian economy, describing the potential for negative repercussions as a result of those measures.
“If we are truly determined to stand with Ukraine, if the stakes in this fight are as high as I believe them to be, we have to be honest with ourselves [and] I have to be honest with Canadians,” she said, “that there could be some collateral damage in Canada.”
All Russian petroleum products have been banned by the Canadian federal government, with a new ban on financial dealings between Canadians and “so-called independent states” of Luhansk and Donetsk also coming into force.
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Tal said Canada could potentially see some economic benefit from the wave of international sanctions, particularly in areas such as energy, agriculture, fertilizers and natural gas.
Canada’s central bank will undoubtedly be closely watching the United States’ response to the crisis, with Federal Reserve chairman Jerome Powell telling the US Congress recently that energy prices are likely to rise in the short term but that the Fed stands ready to curb the threat of higher inflation.
There had been some speculation that the Fed’s March meeting would see the central bank opt for a half-point rate hike, although Powell’s words to the Senate Banking Committee appear to have poured cold water on that prospect for now – partly because of the need to move “carefully” due to the Russia-Ukraine crisis.
“I would be recommending and supporting a one quarter of 1% increase,” Powell said. “I do think it’s going to be appropriate for us to continue to proceed along the lines that we had in mind before the Ukraine invasion happened, and that was to raise interest rates at the March meeting and continue through the course of the year.
“In this very sensitive time at the moment, I think it’s appropriate for us to be careful in the way we conduct policy,” he added, “simply because things are so uncertain and we don’t want to add to that uncertainty.”
