Russia’s invasion of Ukraine has raised global geopolitical volatility to levels not seen since the US-led invasion of Iraq in 2003. The impact on energy and commodity prices has been huge, and escalation of tension between Ukraine’s allies and Russia has sent oil and commodity prices soaring. This has raised investors’ concerns that high prices may linger for longer than the geopolitical event itself and have an outsized impact on global growth for 2022.
The decision by Western nations to explicitly target Russia’s energy exports is seen in several ways. The US is banning imports of Russian oil and gas, while the UK has announced it will phase out its Russian oil imports by the end of 2022. And the European Union, while stopping short of a total ban, has announced a plan to reduce its Russian gas imports by two-thirds within a year.
The likelihood of a more protracted conflict, disruptions to Russia’s energy exports and massive flows of refugees causing Ukraine’s allies to take a harder stance against Russian aggression all suggest the next few months will see greater uncertainty, which will have major implications for the macroeconomic outlook this year.
The expectation is for oil prices to trade at record levels ranging from US$110 to US$170 a barrel over the next few months, way above the US$80 levels seen at the start of the year.
Some relief could come from the US Strategic Petroleum Reserve, increased Organization of the Petroleum Exporting Countries (Opec) and US shale production and, eventually, Iranian supply. But this could still leave oil prices in a higher range for the balance of 2022. It would not be a surprise to see Brent crude oil trade at an average of US$100 a barrel this year.
Economies that are more dependent on energy imports will feel a greater impact. The US will be less affected as it is more energy-independent than other major economies. Higher oil prices will affect consumption, but increased shale oil production will partly offset the drag on growth.
China’s economy too will likely remain resilient, while tasked with a 5.5% gross domestic product growth target in 2022. The Chinese authorities will likely increase policy support, given low inflation, to defend China’s near perfect record of never missing its GDP growth target.
In contrast, the eurozone, the UK, Japan, India and most of emerging Asia are likely to suffer from significantly higher energy costs. Europe stands out from the pack because of its heavy reliance on Russian energy. Given that Europe could feel significant pain from higher energy prices, the European Central Bank will be supportive with its interest rate policy, delaying any interest rate increase until end-2022. This will help mitigate the negative impact of higher energy prices on eurozone growth.
As a result, global growth forecast for 2022 is likely to be lower than what was initially penned prior to the conflict in Ukraine.
Although global growth forecast is set to be lower given the current geopolitical conflict, it will likely still be higher than the average annual growth rate achieved by the world economy since the 1970s — around 3%. The global economy is not expected to experience recession in 2022. Also, growth will still be supported by economies reopening this year as the pandemic eases.
Sustained high energy prices would also be a support for the environmental, social and governance (ESG) theme as it could lead to greater spending on renewables and green energy.
On a geographical basis, countries that are more energy self-sufficient and have higher reserves would also be better positioned to ride out an energy crisis. Malaysia and Singapore are such examples.
The US dollar, already supported by US Federal Reserve rising interest rate guidance, will likely see short-term support as a safe haven asset. And even after the event, the US dollar will remain supported by the Fed’s policy guidance for interest rate normalisation.
Gold is a beneficiary of stagflationary — low growth and high inflation — concerns, fuelled by the spike in energy prices. Gold prices could break above historical highs on escalating stagflation risk. However, it is unlikely that gold can continue to stay high beyond the near term. It is likely to trade lower on the assumption that the global economy manages a soft-landing from this geopolitical event.
Finally, having taken a more cautious tone, given the escalation of sanctions and ban on oil import from Russia, it is wise to remember that with geopolitical events, twists and turns are possible and positive surprises cannot be discounted. As mentioned previously in this column, past geopolitical events have had only a short-term impact on markets. But having done the right thing, that is to increase one’s portfolio resilience, investors at least have one less thing to worry about in 2022.
Michael Lai is executive director of wealth advisory (wealth management) at OCBC Bank (M) Bhd