The devastating impact of the war in Ukraine has had profound economic repercussions. Russia and Ukraine represent a small share of global GDP and financial markets, but the spike in oil and gas prices triggered by the conflict (and the subsequent sanctions) has raised the threat of the worst stagflation shock since the 1970s.
The inevitable reduction in purchasing power of households will affect discretionary consumer spending. This is important as the economic recovery relies on consumers utilising savings accumulated during the pandemic. In addition, higher commodity prices will lower corporate profit margins and therefore reduce overall business investment.
Ukraine’s invasion will give a second wind to inflationary dynamics, that were already volatile in the post-pandemic recovery. However, high prices and deep political uncertainty should ease demand and help prices stabilise.
As a result of the above, central banks are facing a highly complex situation: ignoring is not an option but tightening too fast could easily tip the economy towards a recession.
To read the full AndPapers Q2 2022 click here
