He adds: "Our forecasts even prior to Ukraine were for something close to stagflation, with high inflation and low growth.
"We were expecting the Eurozone to outperform the US this year, as the fiscal stimulus was coming through, and expected the UK to underperform as it re-opened after the pandemic sooner, and also because of government fiscal policy.
"But that has all changed now, the US is basically self-sufficient in oil, there will be a feed through to the rest of the economy, but not to the extent of the Eurozone. Most macro scenarios we have modelled show the Eurozone being hit hardest this year.”
He says there is an element of stagflation which is self-correcting, as if growth slows, unemployment would likely rise, and this would lead to inflation falling as wage pressures and aggregate demand in economies would fall.
In this way, inflation would start to fall alongside the growth, creating a more conventional recession, and allowing policymakers to respond to it in a more conventional way.
But Moec says the UK could suffer the worst outcome if stagflation is on the cards, as in addition to the supply shocks of the pandemic and the Ukraine conflict, there was also the supply shock of Brexit.
He says this is because the labour shortages in the UK are likely to be more persistent than elsewhere, leading to higher wages in the economy and resulting in the inflation lasting longer than, for example, in Wade’s scenario.
In Wade’s scenario, higher inflation is eventually corrected because the higher wages eventually lead to higher unemployment and inflation falls.
But Moec believes that a shortage of workers in the UK could mean unemployment does not rise sufficiently to cause inflation to fall, so the inflation continues on the supply side, and growth remains weak, similar to the UK economy of the 1970s.
Jung is another who says it will be the Eurozone that performs worst, as it is most reliant on Russia for energy, and he feels this may mean the UK economy fares relatively better than the Eurozone.
Rates repercussions
If the economic outlook for the world is changing, policymakers, previously set fair to lift rates this year to combat inflation, may need to reconsider.
This is part of the reason why financial markets initially reacted in a benign way to the Ukraine crisis, investors took the view monetary policy would remain looser for longer, boosting asset prices.
George Lagarias, senior economist at Mazars, says: “Although I don’t think central banks can control supply-side inflation though higher rates, I think they will persist with putting rates up, in the hope they can dissuade people from asking for pay rises and provoking higher inflation. But I think people will see their food bills rise and their energy bills rise and ask for a pay rise.”
