Here’s what could happen to California’s economy in a lengthy Russia-Ukraine war

·4 min read

Gasoline will cost more. Retirees’ accounts will shrink. Oil and natural gas price increases will send the prices of all kinds of things higher..

And the California economy will grow at a sluggish pace, if it grows at all.

Those are some projected effects on the state’s economy should the Russian invasion of Ukraine, entering its third month Monday, continue for an extended period of time.

Economists note that while other factors have been expected to boost the economy — supplies of good increase, people return to work and prices begin to stabilize — the invasion could upend the more optimistic outlook should it go on well into this year and next.

“A dark turn is very much in the realm of possibility,” says a new report from Moody’s Analytics, an economic analysis firm, of prospects under what it calls a “lengthy conflict” scenario.

If the Russia-Ukraine war persists, Moody’s says California’s economy would not grow at the anticipated 2.8%. Instead, it would inch ahead at a nearly-invisible 0.3% clip next year, slightly less than the nation’s projected 0.6%.

That would be a big blow to the state, whose economy had a more severe decline than the nation during the COVID-19 pandemic. In the fourth quarter of last year, the latest data available, California’s economy grew at a 9.4% pace, surpassing the 6.9% for the U.S. as a whole.

Moody’s bases its “lengthy conflict” scenario on assumptions that there would be more sanctions, lower supplies of Russian oil and gas and higher inflation.

Gasoline price inflation

The biggest cost of a lengthy war would involve energy.

California’s gasoline prices have consistently been the nation’s highest, averaging about $5.68 a gallon for regular Tuesday. The Sacramento average was about $5.53 a gallon and the national average was $4.13.

“Oil prices would have the biggest impact on California,” said Gokce Soydemir, professor of business economics at California State University, Stanislaus.

Oil has been trading recently at more than $100 a barrel, up from about $60 a barrel a year ago. The price spike’s effect is felt well beyond the gasoline pump.

“Higher energy prices will dampen consumer demand, particularly for those households that have a higher percentage of their income going towards energy expenses,” said Jerry Nickelsburg, faculty director of the UCLA Anderson School of Management California forecast.

Should the trends continue, not only would there be less money to spend, but prices of other items would go up to reflect the cost of oil.

“Oil is used as an input to everything from medicine to plastic causing prices to jump,” said Sung Won Sohn, president of SS Economics, a Los Angeles-based consulting firm.

Russia and natural gas

Another energy-related problem: Natural gas.

“Consumers in the state depend more heavily than most on natural gas and oil, as opposed to other parts of the country that rely more on electricity for residential energy consumption,” such as heating and cooling, said Adam Kamins, senior director-economic research at Moody’s.

The tighter natural gas supplies also have important potential ripple effects.

“California can see an impact coming from the fertilizer shortage on the price of agricultural commodities,” said Soyedmir.

Fertilizers are one of the biggest items the United States imports from Russia.

There is some disagreement on the impact on fertilizer prices, though.

Fertilizer prices have already jumped, doubling between mid-2020 and this year, according to Aaron Smith, professor of agricultural economics at University of California, Davis.

After the Feb. 24 invasion, prices did not increase much.

“Russia and Belarus are important exporters of fertilizer, and they have been sanctioned by many countries, but the lack of a price bump implies that they are still able to find buyers for their fertilizer,” he said.

“So California farmers face high fertilizer prices, but that was the case even before the invasion.”

The biggest unknown could involve consumer confidence. Consumers drive the economy, which slows if they’re reluctant to spend and invest.

Retirees could see their portfolios shrink as nervous markets react, Soydemir said.

People could recoil at higher prices. “Supply chain disruptions could be significant as inputs like neon and fertilizer take a bite out of the important semiconductor production and agriculture industries. And with these dynamics creating more inflation, consumer confidence could be undermined due to uncertainty,” Kamins said.

None of these worst-case scenarios has happened yet, but Moody’s said they could.

“The Russian invasion of Ukraine has unleashed tragic human consequences accompanied by broad, but thus far manageable economic ramifications,” Moody’s said. Still, it added, “downside risks dominate.”