Russia’s invasion of Ukraine is creating considerable headwinds for global growth, prompting AMG to unveil three new possible economic scenarios for clients to consider as this tumultuous year unfolds.
Right now—just as the global economy was successfully emerging from COVID-19 conditions—trade restrictions, financial sanctions and the war’s outright destruction of productive capacity have intensified and broadened the supply-chain disruptions wrought by the pandemic.
These factors are causing additional production bottlenecks and price spikes in various traded goods, while also raising financial risks and lowering business and consumer confidence. Most institutional forecasters, such as national central banks and multinational securities firms, have substantially cut their near-term global and national economic growth projections.
In the United States, the Federal Reserve’s recent interest-rate increase—and its announced intention to tighten monetary policy much further to suppress inflation—will also weigh on economic growth.
All these developments factor into AMG’s new scenarios for economic growth (2022-2024), which clients should consider when adjusting their investments strategies to best prepare for the Russo-Ukrainian war’s fallout.
According to the Base Case, or most likely scenario, the pandemic’s impact has left total U.S. production of goods and services (real GDP) below its long-run sustainable level (potential GDP). Although economic growth exceeded that of potential GDP in 2021 and was primed to do so again in 2022, war in Ukraine has created the additional impediments noted above. Still, the Base Case anticipates the U.S. economy growing an average of 2.6% from the end of the first quarter of 2022 through the first quarter of 2024—0.7 percentage points less than AMG projected one month ago—but above its long-run growth potential. Yet, a large pool of household savings, ample liquidity and strong labor markets support the release of pent-up demand and growth of capital investment sufficient to power the economic expansion forward, while producers adjust to minimize the disruptions created by current sanctions, which remain in place indefinitely.
AMG’s alternate scenarios, the Buoyant Case and the Somber Case, show the likely range of the impact that the war could have on the U.S. economy via the direct and indirect effects of sanctions and trade. In the Buoyant Case the U.S. economy grows 4.1% over the coming four quarters, while in the Somber Case it flirts with recession, growing only 0.6%.