Originally published October 2022.

In what follows, I will do my best to remain as sensitive to the calamitous human toll the war in Ukraine has and continues to take. Do my best to do so, in the context of trying to gauge what impact these shocking events will have on the UK economy.

As things stand, the invasion of Ukraine has triggered a surge in the cost of energy for households and businesses across the UK. In doing so, the war fuelled inflation in a UK economy already beset with the virus. An unavoidable consequence has been UK interest rates rising to a higher peak than had otherwise been the case, with all the inevitable unwelcome consequences. So much then for the first-order effects of the war on the UK. 

To predict the second order, third order and thereafter effects on the UK, one must understand what the events in Ukraine will mean for not only its neighbours or wider continental Europe, but all nations, far and wide. And by ‘will mean’, I am referring to economic harm and, yes, economic good. For as insensitive as it may seem to say as much, there have been nations which are coming out rather well from events. And such comparative context matters crucially if we are going to be close to accurate in predicting what awaits the UK.

The simple truth is that the dark events unfolding to the north of the Black Sea have not impacted all nations equally. First, they have obviously been far more troubling for the economies of nations proximate to events and/or hitherto more heavily engaged in trade with Ukraine and Russia. Far more troubling, that is, than for a UK geographically and commercially more distant, and we could well see the UK’s relative advantage turn into an absolute one. If the ongoing crisis in energy and trade hitting EMEA nations imperils their economies and currencies, the UK could well see the even more rapid return of EU nationals with settlement status who departed when coronavirus struck. There is also certain to be a wider surge in applications for UK work visas; lest we forget, the UK issued 134,000 visas to Ukrainians in the first half of 2022, almost all of whom are eligible to work. Moreover, in these alarming inflationary times, faltering of economies and currencies across EMEA could not fail to release disinflationary forces into the UK.

Let me point to another comparative positive for the UK deriving from the otherwise calamitous war in Ukraine. In doing so, I am sure to be derided by those who refuse to accept anything could help the UK’s negotiating cause with the EU. Derided I may be, but I believe that with its member nations closest to events in Ukraine severely feeling the strain on their economies, ‘holding the UK as close as possible’ will be preferred over ‘penalising it for Brexit’. There will no doubt be those claiming that penalising Brexit is precisely what needs to happen to discourage the likes of Hungary from daring to follow suit. Well, I see the balance firmly on the side of thawing rather than cooling in terms of UK-EU trade and commercial relations, motivated by the importance of keeping the UK defensively well on-side.

While the UK base rate is currently 2.25%, it is certain to rise, with some suggesting a peak at 6%. I will not dwell on my view that while certain to lift off, the base rate will not reach such a level, and indeed fail to breach 5%. Instead, I want to go on a monetary tour across Europe. It is a fact that the 19-member eurozone faces a prime rate of 1.25%. No less true is that the rate in Hungary is 13%, Czech Republic 7%, Romania 6.25% and Poland 6.75%. And since the ECB is intent on raising its rate, those nations in the EU outside the EZ will have to duly follow, not least those already suffering lofty rates. The simple truth is that for the monetary mess the UK seems to be in, continental Europe is poised to outperform with its own.

Now, there will also be those who will argue that even if the above is to be believed, it will make matters in the UK ‘less bad’, but still hardly such as to ‘look forward to’. This is where we must consider, with sensitivity, how events in Ukraine have impacted regions beyond the comparatively small theatre that is Europe and its environs.

Let us begin our world tour by considering where the United States stands. Well, let’s be frank: it is placed a conveniently safe distance from events. It also sits on a sizeable resource of energy, grain, et al. The stark reality is that being favourably placed means the US has stood (sic) to not only suffer comparatively less, but actually gain commercially in so many ways; benefit not least from the need by ‘the West’ for alternative sources of supply, generating hard earnings and even greater soft power. There is also the inviolate fact that the US stands to gain from its sizeable military-industrial complex (MIC), capitalising on increased exports of explosive hardware. 

This, of course, leads to the issue of a rocketing dollar. Yes, part of this upward surge can be attributed to the Fed lifting off on rates and QT, in response to the inflation-fuelling post-Covid extremely strong US economic rebound which, err, was actually fuelled by ‘lax’ Fed policy. Now, a no less important part of the dollar’s surge has been the traditional headlong rush into dollars whenever there is a nasty geo-political shock. And this is where matters become troublesome. The US is experiencing more monetary tightening than it has for some very considerable time. There will, in short, come a point – very shortly, I believe – when this will manifest itself very negatively on the domestic US economy.

To be clear, I am convinced it is a mere matter of time before there is a sell-off in the dollar. As for the catalyst, I would identify the next rebalancing of its currency management system by the PBOC/CFETS, most likely announced in late December. To my mind, this will even more reduce the dollar’s importance and could well involve Hong Kong breaking ranks with the USD and sterling putting on weight (not merely despite the playing out of its political pantomime, but because of the valuable opportunities that it has opened up). 

Widely around the world there are economies which, in the wake of Ukraine being invaded, have seen the resources they possess become ever more valuable. Of these, Norway is a European exception, on a per capita basis, close to being at the top of the list of beneficiaries. And, of all nations which have enjoyed the spoils of war, China stands out as the largest, given it now by proxy owns so much of the world’s natural resources. Elsewhere around the world are nations which, while not resource rich, sit at such a considerable distance from the shocks which have hit Ukraine that these reach as merely modest ripples. These are nations, moreover, which have not chosen to join the ranks of those engaging in a ‘buyers’ strike’ of all things Russian.

We simply must recognise that the world extends beyond a continental Europe whose size and importance in a global comparative context we so exaggerate. And nowhere do we do this more than in relation to what the region means for the UK’s economic future. True, I have maintained that EU nationals with settlement status in the UK who left when coronavirus struck will – as the spill over from Ukraine hits the economies they left the UK for – be all the more likely return. No less true is that, on returning to the UK, they will work in sectors directly or indirectly serving in ever greater terms the needs of those nations for which 2022 was not the annus horribilis it has been for much of Europe and its environs. Nations, in fact, which 2023 looks like being the year that, in further seeing a lift in China’s fortunes, see theirs lift in turn.