Overview

• The conflict between Russia and Ukraine has caused a significant spike in energy prices –reflecting the importance of Russia in the production and export of oil, natural gas and coal, and limited additional supply elsewhere. In addition, the conflict triggered a broad decline in equity markets, along with increased volatility in financial markets more generally, with expectations around global monetary policy decisions also shifting lower since mid-February.
• The duration of the conflict, and the resulting impact on energy prices, is highly uncertain –however it is clear that energy prices will remain elevated in the near term. Of the world’s five largest oil consumers, three of them (Japan, India and China) are highly dependent on imports for supply, making them more vulnerable to energy price shocks. More generally, the conflict could further impact already disrupted global supply chains.
• It is important to note that the COVID-19 pandemic continues, and remains a major risk to economic activity –particularly in emerging markets (where vaccine protection is generally weaker). As highlighted by the rapid emergence and spread of the Omicron variant, additional highly infectious variants of COVID-19 can not be ruled out.
• We have substantially cut our global forecasts this month –largely reflecting the impact of the Russia-Ukraine conflict –down to 3.7% in 2022 (previously 4.2%) and 3.5% in 2023 (previously 3.6%). The main contributor to this downturn is Russia –which is likely to suffer a deep recession as a consequence of sanctions. In addition, we have lowered our growth forecasts for the Euro-zone, UK and Japan, and, to a lesser extent, for India, China and the US, largely reflecting the impact of higher energy prices. The forecasts are based on an oil price of around $US110/barrel (through to Q2) but, at times, the price has moved well above this in recent days, signalling downside risk to our projections.

For further details, please see The Forward View – Global (March 2022)