The global economy is set to experience uncertainty, sky-high energy prices, and slowing growth as tough Russia sanctions put pressure on markets over the coming months, according to the global research team at Bank of America.
In a Tuesday note to clients, the bank’s analysts warned that “there is no clear off-ramp for Russia” in the Ukraine conflict, and admitted that trying to pin down an exact economic forecast following Russia’s invasion has been like “catching a falling knife.”
“Expert opinion has been repeatedly wrong about the course of events. If we believe the experts, Putin would have never invaded, Ukraine would have offered weak resistance and sanctions would be limited,” the analysts wrote.
The team at BofA lowered their 2022 gross domestic product (GDP) forecasts for the U.S. from 3.6% to 3.3% over the past week, and they now see Euro Area GDP growth falling to just 2.8% this year, compared to 3.5% in previous estimates. The analysts also bumped their 2022 inflation expectations for the U.S. and Euro Area to 7% and 6%, respectively.
However, strong savings rates, low unemployment, and energy independence will help the U.S. economy weather the storm better than most, the analysts predict. Still, they believe Americans should expect lower growth and higher inflation than was previously anticipated in a rough year ahead.
The oil factor
The effect that Russian oil, or lack thereof, has on the global market should not be underestimated.
Oil’s recent price jump to over $130 per barrel after the Ukraine invasion has shocked many market pundits and experts, including Bank of America. The bank’s global research team said they now see a scenario where Brent crude oil prices, the international benchmark, could rise to $175 per barrel by the second quarter. That means more pressure at the pump for average consumers around the world.
Although previous U.S. and European sanctions against Russia were careful to leave oil untouched, that all changed today when President Biden announced a ban on Russian oil imports to the U.S. The president said the ban was part of actions meant “to continue to hold Russia accountable for its unprovoked and unjustified war on Ukraine.” In a recent Quinnipiac University national poll, 71% of Americans said that they would support the move, even if it meant higher gasoline prices.
In response to the ban, regular gas prices jumped to $4.17 in the U.S., a roughly 10 cent jump from Monday. Gas prices are now $1.39 higher than they were just a year ago, according to data from the American Automobile Association.
The European Union also revealed on Tuesday that it would cut Russian gas imports by two-thirds this year, even as Dutch TTF gas futures jumped as much as 25% on Monday, showing Europe’s resolve to stand by their sanctions.
Unlike the U.S., which imports just 3.2% of its gas from Russia, Europe bought around 150 billion cubic meters of Russian gas last year—representing about one-third of its needs, according to B of A.
The tough sanctions from both US and Europe will lead to higher oil and gas prices and have darkened the inflation outlook, according to Moody’s chief economist Mark Zandi, who said in a Tweet on Tuesday that expectations for price increases are threatening “to become unhinged.”
