“The economic sanctions that the US, European governments and other allies have subsequently imposed on Russia have increased risks to the global economic outlook,” Moodys said on Thursday. “In particular, further escalation of the Russia-Ukraine conflict would put Europe's economic recovery at risk. Possible retaliation by Russia in response to sanctions could also cause further energy price shocks, particularly in Europe.”
The Moody’s outlook came on a day when prices of US oil hit their highest since the 2008 financial crisis, crossing $116 a barrel, while those of global benchmark Brent surged to just short of $120.
Some 40% of Europe’s gas and 10% of the world’s oil come from Russia. The country and Ukraine jointly provide 14% of global wheat supply.
“Heightened geopolitical risks are unambiguously negative for economic activity,” Moody’s said, citing inflation from commodity prices as a major catalyst for this. “The magnitude of the effects will depend on the length and severity of the crisis.”
The eurozone’s inflation rate jumped to a new high in February, with the European Union’s statistics agency reporting on Wednesday that consumer prices were 5.8% higher last month from a year earlier, accelerating from January’s 5.1% rate. It was the fourth straight month of record highs for inflation.
Moodys said that while the net impact from the Russia-Ukraine crisis on US gross domestic product will likely be limited, “distributional consequences of higher energy prices could be consequential.”
Prior to the Russia-Ukraine crisis, the US economy expanded by 5.7% in 2021, growing at its fastest pace since 1982. But inflation grew even more. The Personal Consumption Expenditure Index, a price indicator closely followed by the Federal Reserve, rose by 5.8% in the year to December and 6.1% in the 12 months to January, Both readings indicated the fastest growth since 1982. The US central bank’s own tolerance for inflation is a mere 2% per year.