Implications of the Russia-Ukraine conflict: Goldman Sachs

Russia’s invasion of Ukraine has sent shockwaves across the global economy and equity markets. 

Goldman Sachs analysts recently explored the implications of the Russia-Ukraine war for the global economy and markets. Here's their take on how things might unravel.

Outlook for monetary policy remains hawkish

Russia and Ukraine account for circa 2-3% of global GDP, so their overall contribution to global growth is relatively small, said Daan Struyven, senior global economist at Goldman Sachs.

The war has triggered a sharp rise across a basket of commodities, most notably oil and gas. Struyven said this could leave the rest of Europe vulnerable to more inflation, especially since gas has a significant weighting in Europe's Consumer Price Index.

When it comes to monetary policy, Struyven said that his baseline views remain quite hawkish for the US Federal Reserve, with expectations of:

• Seven 25 bps rate hikes in 2022

• Four 25 bps rate hikes in 2023

This would leave US interest rates at 2.75% by the end of 2023.

In Europe, he expects two 25 basis point hikes from the European Central Bank. This outlook has a base case where the Russia-Ukraine impact on growth "remains manageable".

Implications for stocks

Peter Oppenheimer, chief global equity strategist at Goldman Sachs said the market was already in the middle of a correction by the time the Russia-Ukraine crisis hit, triggered by concerns about rising interest rates.

“Equities were already falling before this had happened, and because European markets were not very expensive at the outset, we do think a lot of bad news is already priced in,” said Oppenheimer.

“Inflation hit as a result of higher commodity prices and the potential impact on slowing growth has been the driver of further equity market weakness.”

“The equity risk premium [the extra return investors can expect for buying stocks over risk-free government bonds] has shot up much more, in fact, than most other geopolitical events have triggered over recent years or even decades. But that's understandable because the consequences of this are far-reaching and could be quite long-lasting.”

The bottom line is that the market appears to have absorbed most of the bad news that has already happened. Although the events continue to unfold, which could spur more negative implications for the the global economy and equity markets.