Russia’s invasion of Ukraine creates near-term risks for markets, but also casts a shadow over the longer-term outlook. The immediate threat comes from high energy prices, rising food prices and disrupted supply chains. The longer-term issues are a new cold war between Russia and the West, increased military spending and a further blow to globalization. The war is a defining moment for Europe, which now needs to unwind decades of Russian energy dependence, accelerate its sustainable energy transition and rebuild military capability.
Markets had plenty to worry about before the invasion, including the onset of U.S. Federal Reserve (Fed) tightening, the impact of COVID-19 lockdowns on supply chains and inflation and the outlook for China with problems in the real estate sector, its zero-tolerance COVID-19 policy and heavy-handed regulation of technology firms.
Our theme for 2022 prior to the invasion was The Great Moderation. We expected global growth to moderate from the post-lockdown surge in 2021 but remain above trend. The consequences of the invasion are lower global growth, with Europe taking the largest hit, and higher inflation. Even so, global growth this year should still be above trend, provided hostilities ease and global energy prices stabilize. Above-trend growth should support equities over bonds and cash, but the conflict has created significant uncertainty, which means more market volatility.