Here is an excerpt from an article written by Olivia White, Kevin Buehler, Sven Smit, Ezra Greenberg, Mihir Mysore, Ritesh Jain, Martin Hirt, Arvind Govindarajan, and Eric Chewning for the McKinsey Quarterly, published by McKinsey & Company. To read the complete article, check out others, learn more about the firm, and sign up for email alerts, please click here.
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The war is devastating lives and roiling markets. Here we track the disruptions that seem likely to shape lives and livelihoods, beyond the immediate crisis.
On March 17, 2022, we wrote about the war’s extraordinary toll on lives and livelihoods. At that time, we set out the 12 short- and mid-term disruptions that had the most potential to reshape industries and economies. Those disruptions are gathering force. In this article, we offer 12 charts to illuminate the potential strength and direction of these shifts and their effects on lives and livelihoods. Some of these charts use the macroeconomic scenarios we laid out in our first article that provide guidance on the range of potential outcomes. We see two critical dimensions: the scale and duration of disruption, and the impact of government policy, consumer, and business responses. See sidebar “More on our scenarios.”
The invasion of Ukraine is causing a massive humanitarian crisis
The war has displaced the most refugees in Europe since World War II. To date, 5.6 million refugees have fled Ukraine, and another 7.7 million have left home and sought shelter elsewhere in the country. All told, the war has pushed nearly 30 percent of Ukrainians out of their homes. The war in Ukraine represents the second largest humanitarian crisis since the 1960s in terms of number of people who have fled or been displaced, and fifth in terms of fraction of the population this represents. And it could get worse: the UN estimates that 8.3 million Ukrainians could be refugees by the end of the year
Neighbors and others are helping. Poland, where a large Ukrainian expatriate community already lives, has welcomed the most refugees, about 3 million. That’s equivalent to an 8 percent gain in the country’s population over the course of two months, and it’s 45 times the typical annual inflow of migrants. Measured by the size of the influx relative to the historical average annual arrival of migrants, Slovak Republic welcomed the most, the equivalent of 101 times the annual historical inflow.
Countries’ capacity to feed, shelter, and care for refugees varies. A well-organized, rapidly scaled international humanitarian aid program, such as the UN’s Regional Refugee Response Plan, will surely help. And in the longer term, hinges on how well new arrivals are integrated into the country’s labor market and society.
The vulnerable will suffer the most
The war has sent prices soaring for the essentials. What’s now at risk is the base of the Maslow hierarchy of needs: food, warmth, and shelter. The effects are universal but will be felt most acutely by the poorest, who already struggle to cover the cost of life’s necessities.
Higher prices for food and energy, along with already high costs for rent, can push the poorest into impossible tradeoffs. The invasion of Ukraine has already raised the cost of living, as a spike in natural gas and oil prices have pushed heating bills higher. Similarly, the cost of transportation is moving higher as fuel becomes more expensive. If energy prices spike even higher (Scenario 3C), the compression of household budgets will get worse before it gets better. (See sidebar, “More on our scenarios.”)
Pressures extend well beyond Europe. Our scenario analysis suggests that the United Nations’ Food and Agriculture Office’s index of food prices might rise by as much as 45 percent in 2022 (scenario 3C). Price increases of this magnitude have historically pushed millions of people in low- and middle-income countries into poverty. These countries are also susceptible to other potential ramifications of the war, including a slowdown in global trade, currency depreciation, and challenges in sustaining their debt loads.
Energy policy is rotating toward secure access and source diversification
Over several decades, Europe has come to depend heavily on Russian energy sources: coal, crude oil, fuel oil, and, especially, natural gas. In 2021, the continent imported about 36 percent of the gas it used from Russia, along with 30 percent of its coal and 10 percent of its crude oil. Germany and Italy are particularly dependent on Russian energy supplies (for example, Germany imports 65 percent of its gas from Russia; the figure is 43 percent for Italy).
Europe uses gas to heat its homes and buildings, run its industries, and generate power. Hypothetically, European countries can act in the short term to lower their demand (for example, reducing heating in buildings and lighting in cities; reducing gas use in power generation); these could be put in place by the end of 2022 or early in 2023. Europe is also working urgently to increase gas supplies from countries other than Russia, by importing more liquefied natural gas (LNG) and generating more biofuel, among other moves.
Together these demand reductions and supply increases could reduce Europe’s need for Russian gas within the next year from 36 percent of its total use to about 10 percent—which would leave the continent still importing roughly 30 billion to 40 billion cubic meters from Russia annually. The outcome will depend in part on the implementation of these levers—for example, how much LNG can be imported, and the tolerance of households and employees for reduced heating. If it comes to rationing, based on recent statements from government leaders, industrial users might see their gas supplies reduced before other users.
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