Vantage Point: Volatility  

Ukraine conflict could lead to financial crisis 'worse than 2008'

Ukraine conflict could lead to financial crisis 'worse than 2008'
UN Secretary General visits Irpin, Ukraine (UN photo library)

The conflict in Ukraine and central bank monetary policy, coupled with high inflation and low growth, is creating an economic emergency that could be worse than the Credit Crisis, investors have claimed.

A study compiled by CoreData analysed the views of 200 institutional investors, with a fifth of respondents claiming the present economic situation will lead to an economic crisis worse than occurred in 2008. 

Around half of respondents took the view that the war in Ukraine would lead to “stagflation” in the global economy. 

Stagflation is an economic condition whereby inflation remains very high, but economic growth is below trend. 

The respondents said they anticipate real assets being the asset class offering the best protection against the looming economic conditions. 

Jon Mawby, bond fund manager at Pictet, said: “Politicians have looked to central banks to solve the problem of inflation, and perhaps told them they didn’t care how it was solved, particularly in the US.

"But as growth slows down and we potentially get a recession, then the politicians will be back to the central bankers asking them what they are doing. I was always taught to believe that high prices are the cure for high prices.”

The latest US inflation print came in at 8.3 per cent, which represents a 40-year high. The most watched component of headline inflation data right now is core inflation, as this strips out the highly volatile food and energy sectors. 

Core inflation therefore acts as a measure of how inflation is being transmitted through the wider economy.

In the US, it rose by 0.6 per cent in April, indicating the imported inflation that is the consequence of the Ukraine conflict is spreading to the domestic economy.

Preventing the latter from occurring is generally regarded as being the main rationale for tightening monetary policy right now.   

Rupert Thompson, chief investment officer at Kingswood, said: “US consumer price inflation fell back in April but by less than expected and remained at a 40-year high.

"The headline rate declined to 8.3 per cent from 8.5 per cent, while the core rate eased to 6.2 per cent from 6.5 per cent. "

He suggested any hopes that April would mark the peak for US inflation will have been called into question by the numbers, particularly with core prices posting a large 0.6 per cent gain over the month, up from 0.3 per cent the previous month.

Thompson added: "The data make it all the more certain that the Fed will raise rates by 0.5 per cent in both June and July.”