Macroeconomic consequences of Ukraine’s invasion

All eyes turn to the concept of stagflation, and not a few looked back to the crisis of the 1970s, which was caused by high oil prices, and their influence on both growth and inflation.
Enrique Roca

Former Fund Manager and RankiaPro Collaborator

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Just as we were beginning to emerge from the pandemic, and believed in a normalisation of economic policies, we stumbled upon the war, the economic consequences of which are difficult to quantify, although I think we could point out to the direction of what I believe could happen next.

All eyes turn to the concept of stagflation, and not a few looked back to the crisis of the 1970s, which was caused by high oil prices, and their influence on both growth and inflation.

Although we are in an interconnected world, the crisis will hit Europe harder than the US because of its greater dependence on commodity supplies and its proximity to conflict.

If oil prices were to fall to $150, global growth would fall by 1.7% and the price index would rise by an additional 2%.

In the European Union the predicted growth of 4.6% would barely hover around 4% despite the fact that the adjustment measures (raising interest rates, controlling the deficit and rethinking monetary policy) would be delayed, although with zero interest rates, and high inflation there is little that can be done.

Although history is not exactly repeating itself, in the 1970s the CPI rose by 100% while the SP without dividends rose by 16%. The dollar depreciated significantly against other currencies and gold, oil, metals, Tips and Reits managed to perform relatively well. The health care and utilities sectors also did well, while technology and consumer discretionary did poorly.

Credit spreads will widen and high yield will suffer in this weakening economic environment.

However, let’s not play the fortune teller (although we are taking into account this scenario which we put on watch) as in such an environment, corporate profits are falling and both European and North American results are surprisingly positive.

More than three quarters of the SP500 companies surprised positively in both earnings and revenues. Employment has all the signs of improving in the USA once the Covid earnings are over.

The bottlenecks and supply shocks that seemed to be stabilising are returning again, and it all depends on the duration and resolution of the conflict, which has its effects on reducing the capacity of the world economy to produce goods and services.

In the end, low demand and global stagnation also translates into lower demand for raw materials.

We will see if and how far this oil slick spreads, and has a second round due to the wage effect. Interestingly, the delay in rate hikes, despite increasingly negative real rates, may stop the further bleeding of growth values.

Stagflation is the situation most hated by central bankers who do not know where they stand because whatever they do, they harm the economy either by raising rates with zero growth or by doing nothing and pushing up inflation further.

Stagflation is one of the worst economic situations that can occur, since in addition to the problems derived from a recession such as unemployment and the fall in consumption due to the loss of purchasing power, there is a generalised increase in prices, further deepening the loss suffered by families.

Let’s see what the investment clock is telling us.

Although there are many statistics on the behaviour of the markets after the war, this time we have a more powerful enemy, and a lack of investment in the production of energy and other commodities for several decades, which should make us more alert, since before the conflict we already sensed these problems.

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Macroeconomic consequences of Ukraine’s invasion