| Nira Shamir, Chief Economist, Discount Bank
| highlights:
- Despite the difficulty in predicting developments in geopolitical crises, their impact on markets is usually short-term, and a lull brings attention back to economic developments.
- The main impact on the global economy of the crisis in Ukraine is through commodity prices, and in particular, oil and gas prices.
- Rising commodity prices support an exacerbation of inflationary pressures, in an environment where inflation is already high, and increase pressure on central banks.
The crisis in Ukraine is causing a rise in uncertainty and hitting markets, while at the same time there has been a sharp rise in energy prices and commodities in general. Despite the difficulty in predicting developments in geopolitical crises, their impact on the markets is usually short-term, and the easing of the crisis often brings the markets’ attention back to economic developments, including the inflation environment and expectations of rising interest rates.
The economic consequences of the current crisis depend on the Western response and the depth of the crisis, the sanctions the West has imposed on Russia so far are relatively moderate, and their impact on economic activity in Western countries, however, exacerbating the crisis will lead to more severe sanctions.
The impact on Western countries depends on financial ties, trade ties and more. The eurozone is expected to be hit harder than the US and UK, but the bloc’s exports to Russia account for only 4% of the bloc’s exports, so trade ties are not expected to lead to significant harm.
In addition, financial ties between Western countries, and the eurozone, in particular, and Russia have shrunk significantly since the annexation of Crimea in 2014.
Thus, the main impact on the eurozone is expected to be due to dependence on gas and oil imports from Russia, as the bloc imports 40% of its oil needs and 20% of gas from Russia. This dependence is particularly significant in the Czech Republic, Germany and Italy.
The main impact on the global economy is through commodity prices.
In light of Russia’s significant share of commodity markets, including gas, oil, metals and agricultural commodities, commodity prices are rising, as evidenced by the sharp rise in prices following the crisis to levels not recorded since 2014, approaching $ 100 a barrel during trade.
Rising commodity prices are exacerbating inflationary pressures, in an environment where inflation is already high.
Thus, the crisis in Ukraine increases the pressure on central banks. If in previous crises central banks were able to support markets, today they are also facing significant inflationary pressures, fearing that increases in commodity prices will lead to an increase in inflation expectations and a long-term effect on actual inflation.
The banks’ response to the crisis is not unequivocal, and the banks will weigh the increase in half-inflation against the fear of hurting demand.
We estimate that in light of the low economic downturn and the high inflation environment, central banks are expected to continue to curb monetary policy, so expectations have remained relatively stable in recent days.
The crisis is moderating the rise in long-term yields, in light of the shift to safe assets, however, the impact on short-term yields is not significant in light of the stability in interest rate expectations. We estimate that a calm in the crisis will lead to a continued rise in long-term yields.
The review was prepared by Discount Bank’s Macroeconomics Department, managed by Nira Shamir, Chief Economist at the Bank, and was written by Einat Meir, Discount’s Macro and Market Analyst. The analysis in this review is for informational purposes only and should not be construed as a recommendation, a substitute for personal advice that takes into account the data and special needs of each client or an invitation to such advice or an offer to hold / buy / sell securities or financial assets or a liability of Discount Bank Israel Ltd. : “The Bank”) to advise its customers in accordance with what is stated in it. The opinions presented in the review represent the position of its authors and are not necessarily identical to the position of the Bank’s investment advisers. The aforesaid opinions are correct as of the date of their first publication and may change at any time without the need for prior notice.