The Russian invasion of Ukraine is a humanitarian disaster, in addition to the tragic loss of life and disruption to the lives of many, the economic impact is being felt across the globe. A recent International Monetary Fund (IMF) statement on the global ramifications of the war outlined, ‘While the situation remains highly fluid and the outlook is subject to extraordinary uncertainty, the economic consequences are already very serious. Energy and commodity prices have surged, adding to inflationary pressures from supply chain disruptions and the rebound from the COVID-19 pandemic. Price shocks will have an impact worldwide… The sanctions on Russia will also have a substantial impact on the global economy and financial markets, with significant spillovers to other countries.’
The outlook for macroeconomic policy is becoming increasingly critical. The path of the global economy will be shaped by the consequences of Russia’s invasion and central bank policies; and their ability to keep inflation expectations anchored while allowing a supportive environment for growth.
Even before the invasion, the mix of uncertainties had led the IMF to downgrade its global growth forecast when its latest economic musings were released in January. While the international soothsayer outlined expectations for the global recovery to continue in 2022, it predicted a ‘disrupted recovery’ with growth forecast to moderate from 5.9% in 2021 to 4.4% this year – half a percentage point below the previous forecast made in October. However, this estimate was made prior to the invasion, so it’s likely growth expectations will moderate at the next review point. Back in January, the Organisation for Economic Co-operation and Development (OECD) also expected growth to moderate to 4.4% this year – reflecting forecast markdowns in the two largest economies, the US and China. The OECD expect global growth to slow to 3.8% in 2023.
European Central Bank (ECB) growth projections for the Euro Area are 3.7% in 2022 and 2.8% in 2023. In Q4, soaring inflation, rising virus cases and tighter restrictions impacted the service sector. Eurozone inflation accelerated to a record of 5.1% in January, defying expectations of a slowdown, and further pressurising the ECB to consider tightening monetary policy, which it had previously ruled out. Inflation is expected to remain elevated as the year progresses. European markets fell following the invasion; a sell-off in European and Russian stocks and a shift into low-grade government debt meant that markets experienced a technical correction. Although Germany relies heavily on supplies of fuel from Russia, the Nord Stream 2 gas pipeline approval process has been suspended in the wake of the war and Chancellor Olaf Scholz has announced an unprecedented €100bn boost on military spending. European business activity expanded in February but declined in March as the war weighed on manufacturing and service sector activity, and business confidence declined.
According to Focus Economics, Swiss economic growth moderated in Q4 last year as restrictions were tightened due to rising virus cases. Growth is expected to slow further in Q1, following softer government consumption as pandemic-related spending demands ease. Momentum is expected to remain strong, supported by a stable labour market spurring private consumption. With a stable unemployment rate, services and manufacturing PMIs remained elevated in January. The gradual weakening of EU trade links and virus variants cloud the outlook. The economy is projected to expand by 3.0% this year, followed by growth of 1.9% in 2023. Although Switzerland has sanctioned some Russian individuals and businesses, the country maintains its neutrality.
During the Spring Statement on 23 March, the Chancellor warned that actions against Russia are costly and present a risk to the global recovery. Due to the invasion, the latest economic projections produced by the Office for Budget Responsibility (OBR), note an ‘unusually high uncertainty around the outlook,’ with their revised growth figures indicating a slower-moving recovery. The UK economy is predicted to grow by 3.8% this year and by 1.8% in 2023, both downgrades from the previous forecasts of 6.0% and 2.1% respectively.
The latest OBR figures suggest inflation will average 7.4% across the rest of 2022, peaking at 8.7% during the final quarter. This followed on from the latest ONS data release showing that UK inflation had hit a 30-year high of 6.2% in the 12 months to February.
In March, the Bank of England (BoE) announced the third increase in Bank Rate in four months, placing more pressure on household finances. The Monetary Policy Committee (MPC) members voted by an 8-to-1 majority in favour of the 0.25 percentage point rise from 0.5% to 0.75%, in a bid to dampen soaring inflation. Rates are now at the highest level since March 2020 at the start of the pandemic. The policymakers felt that the rate rise was justified ‘given the current tightness of the labour market, continuing signs of robust domestic cost and price pressures, and the risk that those pressures will persist.’ The Committee said that depending on how medium-term prospects evolve, including economic implications of geopolitical events, ‘some further modest tightening in monetary policy may be appropriate in the coming months.’ The next MPC meeting will take place in early May.
The Conference Board forecasts that annual US Real GDP growth will be 3.0% in 2022 and 2.3% in 2023, commenting, ‘In light of Russia’s invasion of Ukraine we are downgrading our 2022 and 2023 growth expectations and increasing our inflation forecast. The Ukraine crisis is already having a major impact on oil, agricultural commodity, and metal prices around the world. The conflict, and the resulting sanctions, will also trigger recessions in Russia and Ukraine, and directly impact many economies in Europe. New supply chain disruptions will arise as well. These economic and market fluctuations are likely to impact the US economy.’ Average annual CPI is forecast to rise 5.1% in 2022 after increasing at a 4.7% pace last year, according to a Bloomberg survey of economists.
US markets were initially weakened by the Ukraine crisis. Investors positively regarded the certainty of the Federal Reserve’s monetary policy announcement in mid-March. The Fed adopted a measured approach, raising interest rates by 25 basis points and plotted out a route toward six additional rate hikes during 2022. This is the first time the US central bank has raised interest rates since 2018.
Asia and Emerging Market Equities
Prior to the Ukraine invasion, the IMF estimated Chinese economic growth of 4.8% in 2022. Chinese leaders recently announced a GDP growth target of 5.5% for 2022, the lowest in 30 years and yet still higher than most analysts’ predictions. A fresh wave of virus cases, combined with geopolitical pressures are weighing on markets. The IMF outlook expressed, ‘In China, disruption in the housing sector has served as a prelude to a broader slowdown. With a strict zero-COVID strategy leading to recurrent mobility restrictions and deteriorating prospects for construction sector employment, private consumption is likely to be lower than anticipated. In combination with lower investment in real estate, this means that the growth forecast for 2022 is revised down relative to October by 0.8 percentage point, at 4.8 percent, with negative implications for trading partners’ prospects. The outlook has also weakened in Brazil, where the fight against inflation has prompted a strong monetary policy response, which will weigh on domestic demand.’
Like elsewhere, emerging markets have been impacted by the Russian invasion. The spike in commodity prices led Asian markets lower. IMF economic growth projections for emerging market and developing economies are 4.8% growth in 2022 and 4.7% in 2023. The Japanese economy is projected to grow by 3.3% in 2022 and 1.8% in 2023. Japan’s 2023 growth outlook is also revised up by 0.4 percentage point, reflecting anticipated improvements in external demand and ongoing fiscal support.
Commodity prices have risen sharply since the invasion of Ukraine. Crude oil prices have been trading above the $100 a barrel mark as concerns persist over potential shortfalls in supplies. Brent crude prices lifted on the back of more supply uncertainty, particularly in light of attacks on oil facilities in Saudi Arabia. Investors flocked to gold, which is currently trading at around $1,950 a troy ounce. Rising commodities prices are helping underpin gold’s allure as an inflation hedge, while the war fuels demand for safe haven assets.
Soaring inflation, rising interest rates and the tragic Ukrainian invasion have critically entwined to host a potentially disconcerting backdrop for investors, as markets search for a stable footing. With an ever-changing investment landscape, now is a good time to ensure your investments continue to work as hard as possible for you. It’s important to remember that market volatility is normal, and history shows that those who are patient and stick to their plans are more likely to achieve their financial objectives. Please do not hesitate to get in contact with any questions or concerns you may have.
It is important to take professional advice before making any decision relating to your personal finances. Information within this document is based on our current understanding and can be subject to change without notice and the accuracy and completeness of the information cannot be guaranteed. It does not provide individual tailored investment advice and is for guidance only. Some rules may vary in different jurisdictions. We cannot assume legal liability for any errors or omissions it might contain. Levels and bases of, and reliefs from, taxation are those currently applying or proposed and are subject to change; their value depends on the individual circumstances of the investor. No part of this document may be reproduced in any manner without prior permission.
The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated. If you withdraw from an investment in the early years, you may not get back the full amount you invested. Changes in the rates of exchange may have an adverse effect on the value or price of an investment in sterling terms if it is denominated in a foreign currency.