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Global Economy Suffering Collateral Damage From Ukraine Invasion

Well before Russia invaded Ukraine, the International Monetary Fund was already forecasting global economic growth to moderate this year, the result of ongoing inflation driven by supply chain disruptions, energy price volatility and wage pressures. The war in Europe is further exacerbating those inflationary pressures and pushing advanced economies to raise policy rates, creating new threats to growth and risks to financial stability.

Following the outbreak of war, Oxford Economics adjusted its global GDP forecasts down by 0.2 percentage points in 2022 and 0.1 percentage points in 2023 as the conflict increasingly weighs on the global economy. In the U.S., economic indicators such as the Atlanta GDPNow model have provided an increasingly pessimistic view over the past few months, with the latest GDP estimates for the first quarter of 2022 sliding between 1 and 2 percentage points.

Slower growth coupled with persistent inflation increases the risk of stagflation, placing central banks in an uneasy position when it comes to tightening. The European Central Bank has so far been the first to modify its tightening timeline, delaying rate hikes until the last months of 2022 as its economy is the most directly affected by the conflict aside from Ukraine and Russia. In contrast, the U.S. Federal Reserve remains poised to hike rates in March, though the market is now pricing in a 98% chance of a 25-basis-point hike in March instead of the nearly 94% chance of a 50-basis-point hike previously expected by the market in February.

*Article courtesy of Costar

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