Analysis: War in Ukraine affected Romania's GDP by 1.6pct

 Romania's Gross Domestic Product (GDP) in 2022 would have been 1.6% points higher in the absence of the war in Ukraine, while prices would have increased by nearly 1% less than observed, according to the findings of a recent study called "Macroeconomic Consequences of the War in Ukraine on Central and Eastern European Economies: A SVAR Analysis" by Daniel Daianu, Tudor Grosu, Andrei Neacsu, Andrei Tanase and Radu Vranceanu.The analysis focuses on the short-term effects of the shock (in 2022), and, as such, does not allow us to draw conclusions about the structural changes that the war may have brought about. Within the realm of potential structural changes that remain undiscussed, one might consider heightened investment uncertainty in countries near the conflict zone, the persistently higher relative price of energy affecting resource allocation, a worsening of social cohesion, economic decoupling from Russia and reorientation of trade flows toward other countries, and the challenges of managing increased public debt and budget deficits.Conversely, the war may present some positive opportunities for CEE economies. These include the relocation of Western firms previously operating in Ukraine or Russia to the region, increased investment in the defence sector, which could boost short-term economic growth (though budget constraints may impair resource allocation to civilian sectors), and the advancement of strategic projects under strengthened NATO cooperation.From a policy perspective, the findings underscore the critical role of effectively absorbing EU funds, particularly those allocated under the Next Generation EU programs, in mitigating the persistent negative effects of the Russian invasion of Ukraine. These funds can provide much-needed support for economic recovery by financing key investments in infrastructure, green energy, and digitalization, which not only stimulate growth but also enhance long-term resilience.The analysis investigates the macroeconomic effects from the Russian invasion of Ukraine in February 2022 on the economies of Bulgaria, Czechia, Hungary, Poland and Romania.The findings suggest a generally larger impact on economic activity in CEE countries compared to Western European economies, a result that can be attributed to the structural weaknesses of these economies, and to the geographic proximity to the conflict area, which led to a higher volatility of the series in the CEE region.Russia's invasion of Ukraine in February 2022 escalated into a high-intensity, land-based war. Central and Eastern European (CEE) countries responded swiftly to the humanitarian and military challenges posed by the war. They welcomed large numbers of Ukrainian refugees, supplied weapons and ammunition to Ukraine, and worked within NATO to coordinate logistics and military support. Additionally, frontline countries accelerated rearmament efforts.The war in Ukraine brought a new wave of challenges, with rising energy prices driving up production costs and eroding household purchasing power. These dynamics negatively affected the competitiveness of businesses and curtailed consumer spending. As Western Europe, the primary trading partner for CEE countries, also suffered economic disruptions, export opportunities diminished. In this context, governments implemented aid schemes to populations and firms, further straining public finances, while central banks raised interest rates to address the inflation surge. This combination of fiscal and monetary measures highlighted the significant economic pressures faced by the region amid overlapping crises.The assessment includes global variables (GPR index, oil prices, US GDP and US CPI), and country-specific variables (GDP growth, HICP inflation, Economic Sentiment Indicator, Real Effective Exchange Rate and 3-month interbank interest rate), respectively. It also includes the gas price in the global variables, which provided for an important channel of shock transmission in the CEE.The Geopolitical Risk (GPR) index tracks geopolitical tensions based on the proportion of news articles in prominent newspapers reporting adverse events such as wars, terrorist attacks, and any tensions among states and political actors that affect the course of international relations.The results reveal a similar pattern of effects of the war in Ukraine on the CEE economies: higher energy prices, deteriorating export opportunities, lower consumer and business confidence all took a toll on GDP growth. Inflation across the region, which was already high, increased sharply, primarily due to higher energy prices. In response, central banks raised interest rates, while some central banks intervened in currency markets to stabilise exchange rates, maintain financial stability and promote the smooth transmission of monetary policy. As the war had a contractionary effect across the region, governments implemented fiscal support measures such as energy subsidies, price caps, and targeted assistance for vulnerable sectors, including energy-intensive industries and SMEs.