NATO countries and European leaders have ruled out direct military confrontation due to the risk of escalation between nuclear powers, but the economic consequences of the war will be felt throughout the region.
Eurozone growth is expected to stagnate this year amid high inflation pressure - particularly for energy and food – weighing on both demand and production. At the same time, we should see the ECB remove extraordinary policy measures to curb inflation.
Over the long run, central to the European agenda will be the need to replace its oil and gas imports from Russia and accelerate its energy transition towards renewables, without causing further inflationary pressures.
Additionally, supply-chain bottlenecks inherited from the Covid-19 crisis should come under heightened scrutiny and Europe may look for re-shoring and strategic independence.
In the end, this may lead to a stronger and unified Europe, potentially looking at the prospect of a single defence system.
We recommend a highly selective approach in bonds and equities with a focus on inflation resilience.