Analysts at Swiss Re have warned of a worsening global economic outlook following the outbreak of the conflict in Ukraine, with stagflation and recession outcomes now considered to be the baseline expectation.
Given its energy dependency on Russia, Swiss Re expects the immediate impact to be larger for the euro area than for the US.
The reinsurer estimates that the energy price shock alone could lead to at least 1 to 2 percentage points lower GDP growth and at least 1 to 2 points higher inflation in the euro area.
Global inflation is also expected to rise more and growth to slow far more than previously anticipated this year, in addition to central bank tightening, particularly in the US.
And while energy markets have so far been the main focus, Swiss Re further highlights the financial system impact, where market and stability risks are set to rise markedly as Russia becomes effectively ‘uninvestable’.
Energy markets have been the first conduit for the shock, with ongoing price spikes raising our global inflation and lowering our real GDP growth forecasts.
Credit relationships and inward investment in Russia are being hampered, while collateral lending implications could yet manifest, with SWIFT sanctions de jure in force from 12 March.
“We expect this to keep volatility in stock and bond markets elevated and appetite for safe havens high,” Swiss Re analysts stated.
“The financial market effects in addition to the conflict itself will likely drag on growth by weighing on both business and consumer confidence in the real economy, thus also reducing spending and investment outside of Russia.”
Looking ahead, Swiss Re believes that trade flows are the next key channel to watch, with trade in Europe likely to be disrupted in particular due to supply chain issues.
“Supply chain disruption will hurt not only growth via industrial production, but also global inflation. This higher inflation, also in food such as through corn and wheat prices, for which supplies are also being disrupted, could in turn affect societal stability,” analysts explained.
“Taken together, the Ukraine conflict increases considerably the likelihood of downside economic scenarios,” they concluded.
Elsewhere, analysts at DBRS Morningstar similarly warned that the Russia-Ukraine conflict, alongside climate-related losses and legacy COVID issues, will weigh on the P&C sector outlook for 2022, as the market volatility resulting from the ongoing conflict is already affecting equity market valuations of insurance companies.
And rating agency AM Best agreed that the invasion of Ukraine will likely have significant fallout in the capital markets, impacting the entire industry in the short-to-medium term.
