In late December, economist Nouriel Roubini warned that 2022 would "be much more difficult than 2021." He predicted that "the surge of inflation would not be merely temporary" and that "looming geopolitical risks were becoming more acute."
1. A Stagflationary Recession
It's possible that the financial markets and political analysts could "underestimate the implications of this geopolitical regime shift," he pointed out.
On Thursday, the markets initially fell but then rose on the expectation that the war would "slow down the willingness of the U.S. Federal Reserve and other central banks to raise policy rates," Roubini explained.
"But the Ukraine war is not just another minor, economically and financially inconsequential conflict of the kind seen elsewhere in recent decades," he added.
Before World War I, the economist says, analysts and investors mistakenly thought a major global conflict did not lie ahead.
Today's crisis "represents a geopolitical quantum leap," he explained. "Its long-term implications and significance can hardly be overstated."
Overall, in economic terms, a global stagflationary recession is now "highly likely," Roubini argues. In fact, analysts are currently concerned that the Fed and other major central banks may not be able to achieve "a soft landing from this crisis and its fallout."
His own view: "Don't count on it."
This is because the Russia-Ukraine war "will trigger a massive negative supply shock" in the context of a global economy already challenged by pandemic-related problems and inflationary pressures.
"The shock will reduce growth and further increase inflation at a time when inflation expectations are already becoming unanchored," Roubini said.
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2. A Bear Market
The economist believes that the short-term impact of the conflict on the financial markets "is already clear."
Given the "massive risk-off stagflationary shock, global equities will likely move from the current correction range (-10%) into bear market territory (-20% or more)," he explains.
This means government bond yields are poised to drop for a time. They'll then "rise after inflation becomes unmoored."
Oil prices will jump higher — to "well above $100 per barrel," according to Roubini. Plus, many other commodity prices are poised to increase, too, since both Russia and Ukraine "are major exporters of raw materials and food."
Set to strengthen are "safe haven" currencies like the Swiss franc, as well as gold, he says.
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3. Broadly Negative Global Impact
According to the economist, the painful economic and financial consequences of the war and its resulting stagflationary shock will be "largest in Russia and Ukraine, followed by the European Union, owing to its heavy dependence on Russian gas."
Still, he argues, "even the U.S. will suffer."
Rising global oil prices "will strongly affect" U.S. crude oil prices," Roubini explains. While the U.S. is an energy exporter, the impact across the nation's economy "will be negative" as households and businesses endure "a massive price shock, leading them to reduce spending."
As a result, the "otherwise strong U.S. economy will suffer a sharp slowdown, tilting toward a growth recession," he says. "Tighter financial conditions and the resulting effects on business, consumer, and investor confidence will exacerbate the negative macro consequences of Russia's invasion, both in the U.S. and globally."
Sanctions "inevitably will hurt not only Russia but also the U.S, the West, and emerging markets," the economist adds.
There's also the chance that Russia responds to new sanctions by, for instance, drastically cutting oil production to push up oil prices globally, according to Roubini.
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