Russia Ukraine crisis: West faces ‘severe recession’- threat of inflation and stagflation | City & Business | Finance
Sanctions have already dealt a crippling blow to Russia’s economy with the ruble plummeting in value and stock markets forced to close. As a major exporter of commodities such as energy and food products to the global economy though, wider repercussions in the West may be unavoidable. Philip Pearce, Associate for Global Capital Markets at Validus Risk Management, warned: “We live in a connected global economy which means that these sanctions will fundamentally impact the West as well, at a time when central banks are grappling with elevated levels of inflation and on the precipice of an aggressive hiking cycle.” Economist Ann Pettifor told Express.co.uk the current situation confirmed her view the Bank of England had been too hasty to begin raising interest rates, which could potentially restrict growth.
Ms Pettifor, who previously predicted the 2007 financial crash, said: “We’re in for a severe recession, worldwide or certainly in the West.”
“That’s going to be because of higher energy prices but also because we haven’t fully recovered from the Covid shock.”
She warned the UK was potentially looking at a surge in inflation then stagflation, a period of rising prices but low economic growth.
Inflation has been steadily rising across western economies since the second half of 2021 however the Ukraine crisis threatens to push this drastically further.
In statistics revealed on Wednesday for the Eurozone, inflation for February was estimated to have increased beyond expectation to a record high, driven chiefly by energy and food- both areas on which the world is heavily reliant on Russia and Ukraine for exports.
Richard Carter, Head of Fixed Interest Research at Quilter Cheviot, said: “We have already seen a sharp increase in oil and gas prices and the danger is that Putin uses Russia’s gas supplies as an economic weapon to retaliate against western sanctions.
“While dependence on Russian gas does vary considerably throughout Europe, it does mean various nations scrambling to secure gas from sources outside of Russia, which will push up the price.
“This could cause major economic problems for consumers and businesses alike.
“It would also cause a real headache for central banks who are keen to raise interest rates but need to do so without damaging growth.”
Ms Pettifor said she was “pessimistic” as she didn’t feel central bank governors had understood what had happened and wouldn’t take the necessary action.
She also warned the UK government “hadn’t given itself the slack needed to deal with this crisis” pointing to rising taxation and national insurance.
The result she suggested would be people “hunkering down” and cutting back on spending with resulting impacts on jobs and businesses.
While the global economic outlook is increasingly drifting towards low growth and high inflation the forecast for stock markets has become less clear with the FTSE in particular seeing a comeback after a tumultuous few days trading.
So far Russian stock markets have remained closed, although the market view of Russian linked firms has been clearly seen in the poor performance of those listed elsewhere.
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Firms such as Russian bank Sberbank and Russia focused miner Evraz have seen their share prices plummet while major western companies like Shell and BP have begun cutting investment ties in Russia.
Tim Ash, Senior Strategist at BlueBay Asset Management, told Express.co.uk he thought there was a “huge scandal” as to why public sector pension funds had been invested in Russian assets, adding that he’d recently discovered his own university pension was invested in Russia.
Overall though he explained exposure to Russian assets had been reducing significantly in recent years with stagflation and supply chain issues likely to be the biggest economic impacts of the conflict.
Mr Cater agreed market impacts would largely stay in Russia, explaining: “Some European banks, and to a lesser degree UK banks, will have exposure to various Russian banks, but not to the extent that would strike fears of financial contagion.”
