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What the Russia-Ukraine Conflict Means for the Global Economy and Markets

Goldman SachsDaan Struyven, Peter Oppenheimer, Kamakshya Trivedi, Alison Nathan
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  • Direct conflict impact on global GDP is estimated at a reduction of approximately 0.2 percentage points, with financial condition tightening potentially subtracting an additional 0.2 to 0.3 percentage points from growth.
  • Economic contraction is expected to be concentrated in Europe, creating an overall negative growth outlook accompanied by elevated inflation risks, particularly for gas-dependent regions.
  • The Euro area year-end headline inflation forecast has been revised upward to 5.4%, driven by a 25% year-to-date increase in Brent oil prices that is projected to boost global headline inflation by roughly 30 basis points.
  • The Federal Reserve is forecast to implement seven 25 basis point rate hikes this year, while the ECB is projected to execute two 25 basis point hikes, with liftoff anticipated in September and a continued data-dependent approach.
  • German military spending is expected to rise by 0.7% of GDP this year, providing a growth boost of approximately 0.35 percentage points, with similar spending increases anticipated from Spain and Italy.
  • Risk premiums on Russian assets are projected to persist even as other global markets stabilize, while spillover effects into emerging markets are expected to be most acute in Poland, Hungary, and the Czech Republic.
  • Emerging market interest rates are forecast to rise in response to inflationary concerns from higher oil prices, though commodity-exporting nations like Colombia, the Middle Eastern sovereigns, and Canada may benefit from higher commodity prices.
  • The US dollar and Japanese yen are expected to attract safe-haven flows and perform well during the crisis, whereas the Euro is anticipated to face pressure due to geographic proximity to the conflict.
  • Equity markets are viewed as having limited downside from current levels as significant negative news is already priced in, with a strong rebound expected once uncertainty subsides.
  • European budget deficits are projected to increase beyond current levels to fund defense spending and energy transition initiatives, potentially leading to greater fiscal integration.
  • Asset allocation strategies favor overweight positions in cash and commodities, with energy-related equities serving as a hedge against rising commodity costs that boost corporate cash flows.
  • A bimodal outlook for the ECB suggests a divergence between accelerated tightening and a scenario where rates stay lower for longer if growth deteriorates significantly.
  • The probability of a 50 basis point Fed rate hike in the immediate future or early in the year is considered lower than pre-invasion expectations, with a focus on gradual tightening to reduce inflation.
  • If cyclical risk perception broadens, leveraged emerging market assets may face increased pressure despite current opportunities in specific commodity sectors.