Even before Russia’s invasion of Ukraine, inflation and geopolitics were critical challenges to the global economy.
However, the invasion, and related supply chain disruptions, have turned inflation into a bigger geopolitical risk.
- In the wake of COVID-19, unprecedented fiscal and monetary policy support and disruption to supply chains and labor markets had already boosted the cost of living significantly, with wages rising in tandem.
- Policy initially remained supportive on the assumption that inflation would be transitory.
- After the invasion, which was unexpected in many circles, commodity and energy supply issues caused even swifter price rises, which put upward pressure on interest rates globally. Other events such as lockdowns in China have also restricted supply chains.
- In response to high inflation, central banks are tightening monetary policy, constraining economic growth, and raising the risk of recession.
This combination of circumstances may help catalyze political and social upheaval, for which organizations should increasingly be prepared.
- In the near term, developing economies will be especially susceptible to unrest.
- China and India may import more from Russia to support their supply chains, which as such will require closer monitoring from Western firms.
- Inflation and its consequences may help Republicans gain ground in upcoming US elections, which might influence US policy on geopolitical topics.
- Europe could witness growing socio-political tensions if it further restricts Russian energy use and cannot sufficiently offset the economic impact.
- For companies, Germany will be especially important to watch given its dependence on Russian gas.
Written in collaboration with Brunswick Geopolitical’s senior advisor team.