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Emerging economic and business impacts from the Russia-Ukraine conflict.
INTRODUCTION
Russia's invasion of Ukraine is the most serious military escalation since the Second World War – with significant loss of life in the first month of the conflict and an unfolding, tragic humanitarian crisis. The range of scenarios and outcomes remains highly unpredictable, but here we draw together the current consensus on economic and business impacts in 2022 and potential longer-term policy shifts.
In summary:
- Global GDP growth forecasts are being downgraded by c1% (to around 3.5%-4%) for 2022 - with European economies most directly exposed to economic and trade risks. The UK's growth forecast has been reduced from 6% to 3.8% in 2022.
- Price inflation is now expected to hit 6% globally (peaking at 8-10% in some countries such as the UK) – as elevated energy and commodity prices course through the global economy. Oil prices are expected to remain above US$100/b throughout the conflict.
- Supply chain disruption and delays in securing key materials and components will remain a challenge throughout 2022 – including acute risks for food-related exports and the supply of metals critical to industrial sectors such as automotive and aviation.
- Potential longer-term policy shifts include: accelerated investment in clean energy and diversity of energy supplies, increased government spending on defence and fragmentation of global trade and supply chains into more regional, politically-aligned blocs.
Key issues for business will include:
- Sanctions – ensuring compliance with western sanctions imposed on Russia-connected institutions and individuals. Our EU, Trade and Competition team's latest article provides a summary of UK and EU sanctions.
- Supply chain management – reviewing increased supply chain risks (short term) and supply chain structures (medium-long term).
- Managing inflationary pressures – assessing operational efficiency and cost absorption options, reviewing pricing and market positioning to pass through rising costs to customers, and careful management of wage growth expectations.
- Financing strategy and timing – taking account of the anticipated programme of central bank interest rate rises during 2022-23 and the impact of this for (re-)financing and investment/M&A funding plans.
- Assessing strategic risks and opportunities – with signs that the M&A frenzy of 2021 is slowing there will nonetheless remain opportunities for well-capitalised businesses to invest in strategic growth, particularly as price/valuation volatility begins to stabilise.
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