Russia’s invasion of Ukraine presents economic risks that could be felt globally. Given Europe’s dependence on Russian oil and natural gas, its economy faces a very disruptive supply shock. We estimate that higher energy prices will lead to about a 30% larger hit to overall growth in Europe than in the United States. (This complicates the European Central Bank’s plan to raise rates for the first time in eight years.) For the global economy, we expect slower growth in both GDP and corporate earnings.
Over the next 12 months, the market is pricing in the fastest Federal Reserve hiking cycle since the 1990s. The cycle will likely accelerate an economic slowdown that was set to happen naturally as the pandemic receded. Our base case is a soft or “soft-ish” landing, but recession risks have clearly risen. Raising rates enough, but not too much—it’s a tricky balancing act that has historically eluded central banks fighting inflation.
While the pandemic has become manageable for many, China is dealing with its first meaningful virus surge since the pandemic’s early days. Continued COVID-19 lockdowns are curtailing consumer activity and the production of goods critical to global supply chains. Policymakers seem committed to Zero-COVID policies that increase risks to the global growth outlook.