Skip to Content

How events in Ukraine change our economic views

Rising energy prices drive our growth, inflation views Ukraine events imply less growth, greater inflation 

The initial impact on the global economy from the tragic events in Ukraine will be delivered primarily through higher commodity prices, according to a new analysis by Vanguard’s global economics team. The higher prices, most notably for energy, will hamper growth and cause broader prices to climb further than previously expected, according to the analysis. 

Tighter financial conditions, diminished consumer and business confidence, and elevated uncertainty will also have an effect, though to a lesser extent. The economic impact is likely to be more profound in the euro area, given its greater dependence on Russian energy, than in the United States or the United Kingdom. 

Persistently higher energy prices and tighter financial conditions could shave up to a percentage point from previously anticipated 2022 growth for the euro area, the United Kingdom, and the United States. Meanwhile, inflation, as measured by headline consumer price indexes, could accelerate by 1 to 3 percentage points above what Vanguard had previously forecast. 

Investors need to appreciate the tremendous uncertainty confronting markets, said Shaan Raithatha, a London-based Vanguard senior economist, part of the team researching possible effects from a range of potential developments. He emphasized, “The work we’re doing is based on conditions at present, and the situation is clearly fast-moving.” 

Rising energy prices likely to weigh on growth and generate higher inflation 

Notes: Prices are daily settlement prices for front-month Brent crude futures traded on the Intercontinental Exchange in London and for front-month West Texas Intermediate crude futures traded on the New York Mercantile Exchange. 

Sources: Vanguard illustration, using data from Bloomberg as of March 2, 2022. 

Prices of benchmark oil futures trading in both London and New York are up more than 45% since the start of the year and more than 20% since a week before Russia’s invasion of Ukraine, reflecting both oil’s greater perceived risk and concerns about restrictions on supply. 

How long high energy prices persist and to what degree will be vital to informing whether our views move from our baseline case to a downside of even slower growth and higher inflation. For conditions to deteriorate to the point of ushering in a recession, oil prices would need to climb to a range of $130 to $150 a barrel for several quarters and financial conditions would need to tighten broadly, according to the Vanguard economics team’s analysis. Vanguard foresees developed-market inflation averaging more than 8% for all of 2022 in such a case. 

Growth and inflation effects would be felt more acutely in the euro area, which gets 40% of its natural gas and 25% of its oil from Russia,1 than in the United Kingdom or the United States, which use much less Russian energy. 

Central bank policy decisions hang in the balance 

The developments in Ukraine present central banks with a pertinent challenge: Do they continue down the path toward tighter monetary policy to fight even higher inflation, or do they pause and take stock given the new risks to growth? Vanguard currently doesn’t expect recent developments to materially affect U.S. Federal Reserve and Bank of England policy stances. The Fed’s chair told Congress on March 2 that a hike in the federal funds rate target at the Fed’s March 16 meeting remained appropriate, though he did acknowledge concern over events unfolding in Ukraine. 

The European Central Bank (ECB), meanwhile, meets sooner, on March 10. Vanguard hasn’t changed its expectation for a late-2022 ECB rate hike, though we’ll be watching developments closely. “Our view is that recent events and the accompanying uncertainty have the potential to make the ECB more cautious,” Raithatha said. “This will skew the balance of risks toward the Governing Council delaying its normalization of monetary policy. The ECB will also stand ready to provide additional liquidity should the proper functioning of markets be impaired.” 

Source: Eurostat, the European Union’s official statistical agency. 

Notes: 

All investing is subject to risk, including the possible loss of the money you invest. 

Your use of this site signifies that you accept our terms and conditions of use and privacy policy.

© 2022 VIGM, S.A. DE C.V. Asesor en Inversiones Independiente (“Vanguard Mexico”). All rights reserved.

This website is for institutional and sophisticated investors only. Vanguard Mexico will not have any responsibility for the use given to the information contained in this website.

Vanguard Mexico registration number: 30119-001-(14831)-19/09/2018. The registration of Vanguard Mexico before the Comisión Nacional Bancaria y de Valores (“CNBV”) as an Asesor en Inversiones Independiente is not a certification of Vanguard Mexico’s compliance with regulation applicable to Advisory Investment Services (Servicios de Inversión Asesorados) nor a certification on the accuracy of the information provided herein. The supervision scope of the CNBV is limited to Advisory Investment Services only and not all services provided by Vanguard Mexico.

The content of this website is solely for informational purposes and does not constitute an offer or solicitation to sell or a solicitation of an offer to buy any security, nor shall any such securities be offered or sold to any person, in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities law of that jurisdiction. Reliance upon information in this website is at the sole discretion of the recipient.

Securities information provided in this website must be reviewed together with the offering information of each of the securities which may be found on Vanguard’s website:https://www.vanguardsouthamerica.com/en/products/financial-products or www.vanguard.com

Vanguard Mexico may recommend products of The Vanguard Group Inc. and its affiliates, and such affiliates and their clients may maintain positions in the securities recommended by Vanguard Mexico.

The information contained in this website derived from third-party sources is deemed reliable, however Vanguard Mexico and The Vanguard Group Inc. are not responsible and do not guarantee the completeness or accuracy of such information.

You may leave Vanguard South America’s website when you access certain links on this website. In so doing, you may be proceeding to the site of an organization that is not regulated under the Mexican regulation. Vanguard Mexico has not examined any of these websites and does not assume any responsibility for the contents of such websites nor the services, products or items offered through such websites.

The information contained in this website should not be considered as an investment recommendation, a recommendation can only be provided by Vanguard Mexico upon completion of the relevant profiling and legal processes.

This website is for educational purposes only and does not take into consideration your background and specific circumstances nor any other investment profiling circumstances that could be material for taking an investment decision. We recommend getting professional advice based on your individual circumstances before taking an investment decision.

The information contained herein does not constitute an offer or solicitation and may not be treated as such in any jurisdiction where such an offer or solicitation is against the law, or to anyone for whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so.