Economy

Ukraine crisis could hit already jittery global markets hard

Russian invasion could fuel inflation and have an impact on economic growth

A Ukrainian supporter demonstrates in front of the Chancellery in Berlin. Photograph: Clemens Bilan/EPA

Sat Feb 26 2022 - 05:56

Sometimes, watching the financial markets, it is tempting to believe they are operating on a web of information available only to insiders. But right now investors and traders are as unsure as the rest of us about how events might play out in Ukraine.

Markets were more stable on Friday after Thursday's upheavals, but the shocking outbreak of a type of conflict not seen in Europe for many years means this is an uneasy calm. There is clearly the potential of a significant hit to global growth prospects, via higher energy prices and a hit to confidence. And, in turn, this has a big potential impact on market valuations.

The markets are being hit at a time when uncertainty was already relatively high. After a strong run, many shares are highly valued by historical standards. The rise in the rate of inflation and the likely response of central banks already had investors on edge.

A half-point rise in US base interest rates in March had appeared nailed on, but now many analysts wonder might it just be a quarter-point increase

A key issue already under debate is what this means for Central Bank policy and the expected trend towards higher interest rates, first in the UK and US and later in the year in Europe.

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On one side, the invasion clearly threatens to increase inflation, mainly through its impact on fuel prices – the €2 litre of petrol could soon come into view here – but also in other areas. Ukraine, remember, is known as the “ bread basket of Europe”, and interruptions in supply look set to add to existing pressures in food inflation.

This widening of inflation across sectors will worry central banks.

However, the conflict could also mean a hit to global economic growth, notably in Europe, and particularly in countries such as Germany with close trade links with Russia and a significant dependence on Russian gas.

On balance, many analysts believe that, despite the inflation risk, this could stay the hand of central banks in increasing interest rates and running down supports for government borrowing .

A half-point rise in US base interest rates in March had appeared nailed on, but now many analysts wonder might it just be a quarter-point increase. Just as it appeared central bank policy might “normalise” after Covid, another massive and unexpected uncertainty has appeared.

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