MARKET VIEW
extent Healius were the drivers of the negative trend , whilst CSL , the sector ’ s largest member saw a positive revision since reporting its results .
Inflation Concerns
Global stock markets entered 2022 on a downward trend as investors contended with several headwinds . Slowing economic growth , tightening monetary policy , hot inflation , and rising interest rates . However , the markets have taken another leg down following Russia ' s invasion of Ukraine . Europe , with its geographic proximity to Russia and closer economic ties , has borne the brunt of the selloff .
Global markets had already been in the process of integrating the impact of high inflation into valuations , but the Ukraine conflict is leading to an even greater concern that inflation will be higher for longer . For now , the greatest risk to the markets is determining how high inflation will rise and how long it will persist before it subsides . Persistent inflation on energy and commodities could depress global economic growth by lowering the amount of spending on other goods and services as well as pressure on operating margins . Our base case is that this conflict will lead to a large ( but one-time ) increase in inflation . But , if long-term price assumptions are correct , these inflationary effects will eventually unwind , resulting in future deflationary pressures .
The impact to global real GDP is more complicated . It depends on central bank reactions , as well as the constraints central banks face , where the most important variable is inflation expectations . The primary concern is that the burst in inflation leads to longer-run inflation expectations rising above the U . S . Federal Reserve ' s 2 % target . If so , this would necessitate a steep slowdown in GDP growth to reduce inflation until inflation expectations settle back down . If inflation expectations remain anchored , there ' s much less reason for central banks to react to the conflict by tightening monetary policy compared with the path it would have pursued otherwise . But the dynamics of inflation expectations are inherently unpredictable , so central banks may opt for a good deal of precautionary tightening . Ultimately , though , any impact to global real GDP would be almost entirely temporary .
Russia ' s exports as a share of global GDP are around 0.3 %, and the long-run supply-side impact on the global economy would be just a fraction of that , even if exports stayed at zero . Impact on the EU ' s economies , which are more heavily connected with Russia , could be more meaningful , particularly if Russia moves into a deep recession . Previous rounds of sanctions in 2014 didn ' t have a material impact on the EU economies , but the situation is different now . The severity of the current round of sanctions , a greater likelihood of a more pronounced recession in Russia , and dramatically higher energy prices are likely to lift inflation and decelerate growth in the region . Capital Economics already revised down its eurozone GDP growth forecast to 2.8 % from 3.5 % and lifted inflation expectations to 5.5 % in 2022 .
The U . K ., while less exposed to Russia , isn ' t immune , with Capital Economics raising its inflation forecast by 200 basis points . Further rising energy prices have the potential to materially suppress consumer purchasing patterns , as retail energy prices are at all-time highs . Most European governments have indicated a willingness to partly shield households , but as Mark Rutte , the prime minister of the Netherlands , recently told lawmakers , " We all have to deal with a loss of prosperity ".
Bruce McLeary
Associate Director - Research Senior Analyst ( 07 ) 3006 7219 bmcleary @ burrell . com . au
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