Some economic implications of the war between Russia and Ukraine
|Summary
- Oil prices have shot up significantly and equity prices have tumbled following the news that Russian forces have entered Ukrainian territory.
- Parsing out the precise economic implications of the war at this point is essentially impossible. But we lay out some data and scenarios in this report we think are instructive when contemplating how the future may play out for different economies.
- We ran a simulation in which we raised oil prices by $25 per barrel above their average in Q4-2021 and held them there through the end of 2023. This shock reduced GDP growth in the United States and Germany, but not by enough to send either economy into recession. CPI inflation rates in the United States and Germany rise by roughly one percentage point in 2022.
- In our second simulation, we reduced the S&P 500 index by 20% from its baseline over the next two years. The growth-reducing effects of this shock were larger in the United States than in Germany.
- When both shocks occur simultaneously, as they have so far, real GDP growth downshifts considerably in the United States and CPI inflation rises. However, relative to our pre-invasion forecast, the U.S. economy still does not slide into recession.
- Much will depend on the reaction of major central banks. The marked decline in sovereign bond yields which has followed the news of the invasion indicates market participants believe that central banks will now proceed more cautiously, an interpretation which seems reasonable to us.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.