The Russian invasion of Ukraine in February 2022 brought dramatic uncertainty to the world’s capital markets. As a result, commodities prices spiked suddenly, led by strong bullish trends in crude oil, gold, and wheat.

Can the Russia-Ukraine war prompt a U.S. recession? Read on to learn more about the situation and what to expect for the rest of 2022 into 2023.

What Is a Recession?

A recent Forbes Advisor article defines a recession as “a significant decline in economic activity that lasts for months or even years.” In developed economies, a recession is viewed as being a pullback in gross domestic product (GDP) as well as a rise in unemployment.

In years past, a recession was defined by two consecutive quarters of shrinking GDP. However, according to the National Bureau of Economic Research (NBER), a recession is traditionally defined as “a significant decline in economic activity that is spread across the economy and lasts more than a few months.”

So what causes a recession? An economic pullback can stem from any number of factors, such as inflation, deflation, exorbitant asset prices, or an external market shock. Although relatively brief, the most recent example of a U.S. recession occurred amid fallout from the COVID-19 pandemic.

Will the Russia-Ukraine War Spark a U.S. Recession?

When Russian forces invaded Ukraine in late February 2022, the world’s capital markets saw considerable volatility. Risk assets fluctuated wildly as stock traders evaluated the potential impact of the conflict. Commodities rapidly spiked, led by gold breaking the $2,000 barrier and West Texas Intermediate (WTI) crude oil futures topping $130.00 per barrel. Perhaps the biggest mover was wheat futures, as indicated by nearly a 40 percent uptick in July KC HRW futures during February and March 2022.

Does the Russia-Ukraine war qualify as an economic shock? Many analysts believe so. For instance, lead economist for the Bank of America Michael Hartnett released this statement: “The conflict means a bigger inflation shock, smaller rates shock, and a bigger recessions shock.” He also suggested that “an oil price spike and military-sanctions escalation cycle” were probable.

At the March meeting of the Federal Reserve (Fed), the sentiment was largely the same. Official projections from members of the Federal Open Market Committee (FOMC) suggested that U.S. real GDP was to drop significantly from 6.5 percent in 2021 to 3.3 percent in 2022 and 2.2 percent in 2023. The primary reasons for this extended decline were attributed to supply chain disruptions and rampant USD inflation.

In his early March testimony in front of the Senate Banking Committee, Fed Chair Jerome Powell identified the Russia-Ukraine war as a primary inflation driver. When asked about the economic consequences of Russia/Ukraine, Powell replied, “Commodity prices have moved up; energy prices in particular. That’s going to work its way through the U.S. economy. We’re going to see upward pressure on inflation, at least for a while.”

Powell was correct. Due to the spike in crude oil values, gasoline reached an all-time high average price in the U.S. of $4.17 per gallon. The lofty energy prices were viewed as a primary catalyst for inflation. To combat inflation, the FOMC voted to raise interest rates by 25 basis points at its March meeting. The policy move was to be the first of as many as 11 rate hikes through year-end 2023.

From a financial standpoint, the Russia-Ukraine war has been a U.S. inflation driver. And, to combat the 40-year highs in inflation, the Fed is poised to enter a hawkish policy cycle. According to Deutsche Bank research strategist Jim Reid, “2022 is unlikely to be a U.S. recession year, but late 2023 or early 2024 are high-risk.”

Is a U.S. Recession Imminent?

Economic cycles are driven by various complex factors. For early 2022, it’s difficult to argue that the Russia-Ukraine war isn’t a primary driver of high energy prices, USD inflation, and the new hawkish Fed policy. Given this scenario, many economists are assigning a 30 percent chance of a U.S. recession developing in the coming years.

One of the great things about futures is that you can make money during economic expansions and contractions. For more information on how you can navigate the challenges posed by Russia-Ukraine and Fed tightening, contact the market professionals at StoneX Financial today.