Russia Ukraine: Frozen conflict heats up

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Key points

• At the time of writing, Russia had embarked on what appeared to be a full-blown invasion of Ukraine.
• Many relevant factors remain uncertain, but we will provide guidance on how we may adjust our baseline outlook.
• We assume that oil and gas prices stay elevated for much longer driving headline inflation around 1 percentage point (pp) higher across key regions this year.
• Price rises will exacerbate real income squeezes, resulting in global GDP slowing to 3.6% this year (from 4.0%), with output falling by 0.6 to 0.3pp in key economies.
• Beyond Russia and Ukraine, European economies look to be most affected. We assume little change to our monetary policy outlook but further fiscal easing is possible in the Eurozone and UK. In the US, we consider an adjustment in our outlook to Federal Reserve tightening to stabilise growth.
• Financial markets have reacted bearishly, with the US dollar gaining most safe-haven flows. Yields fell back, equities were lower and corporate spreads widened. However, moves initially were modest and orderly.