PERSPECTIVE3-5 min to read

War in Europe adds another twist of stagflation



Keith Wade
Chief Economist & Strategist

As we were finalising this article, Russia launched a full-scale invasion of Ukraine and brought war back to Europe. We have updated our forecasts, but in a fast moving and dangerous situation uncertainty is particularly high.

From a trade and finance perspective Russia is not significant enough to derail the world economy. However, the links through commodity prices are key and Russian aggression looks set to keep energy and food costs elevated. The fall in asset prices if sustained will also dampen global activity as will higher uncertainty.

In this respect, events in Ukraine add a further stagflationary twist to the outlook by pushing up inflation and weakening growth. The tightness of labour and product markets means that we were already heading in this direction.

We now expect global growth of 3.7% this year and CPI inflation coming in at 4.7%. In our previous forecast last November, these figures were 4% and 3.8% respectively. Significant downgrades to the Eurozone and UK account for the weaker growth forecast whilst inflation is revised up across the board.


We still expect pent up savings to provide a cushion for consumers against the increase in living costs to maintain spending and growth. An easing of supply chains and peaking in commodity price rises should also help ease inflation, as will a moderation and rebalancing in consumer demand as fiscal stimulus fades.

The Fed is still expected to tighten with lift off in March, but to move more gradually with four hikes this year. Recent events reinforce our dovish stance on the European Central Bank, who are not expected to move until later in 2023.

We continue to expect growth in emerging markets to slow and have trimmed our forecasts to 4.2% for this year and next. High inflation continues to impede activity and while we expect price pressures to ease in the months ahead, substantial interest rate hikes during the past year will increasingly weigh on growth.

Despite the changes to the global forecast, the risks are still skewed toward stagflation either through a wage-price spiral or an even greater escalation of the Ukraine crisis. The chances of rising prices triggering another recession, as in earlier cycles, have clearly risen especially as central banks have limited room for manoeuvre given the high level of inflation and lack of economic slack.

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Keith Wade
Chief Economist & Strategist


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