Vantage Point: Volatility  

The economic consequences of the Ukraine conflict

  • Discover how the Ukraine crisis could impact inflation around the world
  • Understand the consequences for investors of stagflation
  • Discover how the crisis could impact economic growth
The economic consequences of the Ukraine conflict
Ukrainian soldiers inspect trenches used by Russian soldiers during the occupation of villages on the outskirts of Kyiv, Ukraine (AP Photo/Rodrigo Abd)

The ongoing human tragedy in Ukraine will have a lasting impact on all of those living through it.

While we all hope it will end as soon, and as peacefully as possible, the economic consequences may resonate through markets and client portfolios for many years to come.

The immediate, and most obvious impact, is the propensity for this crisis to lead to much higher inflation around the world, and to have a sharply negative impact on economic growth. 

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This is primarily as a result of sanctions and other restrictions on the sale of oil, gas and other commodities from Russia. 

Sharply higher inflation can come from the supply side, that is, prices increasing due to a reduction in the supply of goods and services, or the demand side, which is the consequence of demand for goods and services rising at a faster pace than the supply is increasing. 

The present conflict in Ukraine, by restricting or making more expensive commodities produced in the region, is essentially exporting higher supply-side inflation to the rest of Europe and many emerging markets.  

Supply side, says Gilles Moec, chief economist at Axa Investment Managers, is "exactly the type of inflation you don’t want, because it is not caused by the dynamics within the economy.

"And then two things can happen: the first is, businesses react with uncertainty to the changing economic conditions, and so choose not to expand or invest. The other outcome is that as energy prices rise, disposable incomes fall, which reduces spending in other areas of the economy and so causes GDP growth to fall". 

The impact is particularly acute when the commodities in shorter supply are oil, gas and grain, as the poorest 20 per cent of the population spend around half of their income on those items.

More broadly, in the Eurozone economy as a whole, a 20 per cent increase in oil prices reduces total spending power by one per cent, greatly impacting the level of GDP growth. 

Supply shocks

Prior to Russia’s invasion of Ukraine, Moec had been relatively relaxed about inflation, saying he believed it would prove to be transitory as global economies exited restrictions, but now he takes the view that inflation could be more persistent for longer. 

He says: “It is really difficult to know, because between the pandemic and Ukraine, we have had two big supply shocks in three years, and that has not really happened in history.” 

Supply-side inflation is generally regarded by economists as likely to be shorter term in nature than demand-side inflation, this is because if businesses see a shortage of something relative to the level of demand for that product or service, they increase production to meet the demand.