UBS has tweaked its global growth forecast on the back of the 50 per cent drop in trade volumes to Russia and the sharp contraction in the country’s economy.
In a market update on Tuesday, UBS said the global economy will grow by 3.6 per cent, down from the earlier predicted 4.6 per cent, weighed down by events in Ukraine with the Russian economy expected to contract by as much as 9.7 per cent.
But, according to UBS’ economists, this scenario is highly dependent on where commodity prices settle and whether energy support to Europe will be disrupted. In the investment bank’s most adverse scenario, global growth could fall further to just above 2 per cent and Europe could descent into a recession.
However, UBS is confident a stagflation can be avoided.
Although European equity markets appear to be pricing stagflation, the bank’s economists believe the world can avoid a 1970s rerun.
‘Economic tool will be heavy’
BlackRock has a slightly more worrisome outlook, with its chief investment strategist for the APAC region, Ben Powell, noting the economic toll will be heavy, especially for Europe.
“The Ukraine war has caused a spike in energy prices, putting a damper on growth and exacerbating supply-driven inflation,” Mr Powell said.
“Europe is facing a large, stagflationary shock, in our view.
“Analysts are ratcheting down their growth forecasts and upping their inflation projections. This is not over, and we believe the European Central Bank growth forecasts understate the shock’s impact on growth,” he explained.
But the central banks are in a bind.
“Central banks have to normalise policy as the economy no longer needs stimulus, we believe, so policy rates are headed higher,” Mr Powell said.
He expects a historically muted cumulative response to inflation, as the banks recognise more aggressive tightening would translate to high costs to growth and employment.
“Central banks will be forced to live with inflation,” he said.
“But it’s tough to see central banks coming to the rescue to halt a growth slowdown in the inflationary environment.”
Mr Powell’s conclusion is that central banks are less likely to shape macro outcomes going forward, with fiscal support expected to take centre stage.
“The war has raised the prospect of fiscal stimulus to achieve energy security and up defence outlays, but we see this taking time.”
Looking to the future, Mr Powell said, the risks are twofold.
“In the short run, escalation of the war and more energy supply shocks are key catalysts for more risk-off market moves. We see a risk of inflation expectations becoming unanchored in the medium term, causing central banks to raise rates sharply,” he said.
“Energy prices are now driving growth, rather than being the result of it. This raises the spectre of stagflation – something that was not in play before due to the economy’s strong growth momentum.”
