United States: Economic Impact of War in Ukraine

At first glance, the American economy has little direct fear of the war between Russia and Ukraine. Trade exposure with combatants is negligible. With the added effect of triggering the potential for lower demand from EU countries, commercial risk remains low, less than half of GDP. Ultimately, some sectors have the potential to win (energy, defense). Nevertheless, this event is not important. Uncertainty shocks can weigh on the trust of agents and the market. In this case, the most serious thing is that the war has fueled inflationary tensions, which are already well above normal.

US focus Chief Economist Bruno Cavalier and Economist Fabian Bossy

Russia’s invasion of Ukraine marks the resurgence of major geopolitical tensions in Europe. The United States is far from the stage of the operation. Trade with Russia, Belarus and Ukraine is of little importance (Photo). In 2021, imports of goods from these countries accounted for 0.14% of GDP. Dependence on Russia is only important for the heavy oil type palladium, some alloys, and the king crab from Kamchatka. Nothing is absolutely essential.

US: Trade exposure to Russia and Ukraine

This is the difference between Russia and Europe, which has a great need for gas and oil. On the export side, US companies have little to lose. In 2021, they exported $ 9 billion, or 0.04% of GDP, to the region. Indirectly, if conflict weighs on EU growth, demand directed at the United States will be affected. Exports of goods and services to Europe account for about 3% of US GDP. In serious scenarios, this channel could remove a few tenths of US growth. It is difficult to quantify the possible positive effects, but they can result from increased investment in the defense and energy sectors. Ultimately, if the EU wants to reduce its dependence on Russia, it needs to find other suppliers of gas and oil.

Geopolitical risk index
Geopolitical risk index

The real financial risks are elsewhere. Above all, it is due to heightened tensions in energy prices, which has a negative impact on household purchasing power. It also goes through a channel of trust. Uncertainty shocks can mitigate risk and even limit certain spending as a precautionary measure. At this stage, the duration and intensity of the shock is not yet known. The impact remains unknown. Fed researchers have built indicators of geopolitical risk for over a century.1.. At this scale, the beginning of the war in Ukraine is barely noticeable (Graph). However, historical reviews suggest that the negative effects on the economy do not result from isolated conflicts, not from tensions and heightened threats between large blocks.


As expected, retail sales in January recovered significantly (+ 2.1% m / m nominally from -0.8% in December). This rebound is primarily due to spending on goods that incorporate a strong price effect.Household income stagnates due to a sharp drop Child tax credit.. As a result, the savings rate returned to 6.4%, falling below pre-Covid levels for the first time. Inflation measured by the PCE deflator continued to accelerate along the CPI. Compared to December 2021, it increased by 0.3 points to 6.2% in the comprehensive index and 5.2% in the underlying asset index in one year.

Orders for durable consumer goods were strong again in January, rising 1.6% m / m (+ 0.9% excluding unstable defense and transportation categories). Due to strong domestic demand, the trade deficit increased from $ 100.5 billion in December to $ 107.6 billion.

In February, manufacturing buyer sentiment rose 1 point to 58.6. (The ISM investigation was conducted before the armed conflict in Ukraine occurred). Optimism was especially noticeable with new orders (+ 3.8pts to 61.7). Tensions in the production chain (delivery dates, customer inventories) have not eased last month, but have remained below their 2021 peak. On the other hand, in services, the ISM index fell from 3.4 points to 56.5 points. This will decrease for 3 consecutive months (cumulative -12 points). Panel companies say they are struggling to meet demand due to supply constraints, logistics disruptions, and labor shortages. Until February 18th, and therefore before the sudden exacerbation of geopolitical tensions, the beige book of information has the same notation.

Economic growth is described as moderate or moderate. The period under consideration was still affected by the Omicron wave, causing confusion for certain business units and certain costs. Due to high sales, companies still have difficulty meeting their labor needs. But this time, Covid’s absence was eliminated earlier than the previous wave. There are no signs of easing in prices. Pressure on input prices remains strong, with companies reporting their ability to pass on increased costs to consumers. At this stage, this doesn’t really put pressure on demand.

The levels of various activity indexes are good, but real GDP growth will slow in the first quarter, according to the Nowcast Index, as the strong inventory contributions (+4.9 points) in the fourth quarter of 2020 will not recur. Is set to. The Atlanta Federation estimates that inventories will remove 2.5 points of growth in the first quarter and nearly one point of foreign trade enough to bring growth close to zero.

Monetary policy and fiscal policy

Jerome Powell heard from a parliamentary committee on March 2-3 and submitted the Fed’s semi-annual financial report. In the preamble, he pointed out how much the war in Ukraine raised the level of uncertainty without fear of disproportionate impact on the US economy (see p.1). Prior to his hearing, the futures market had significantly lowered expectations for a rate hike. The implicit probability of a 25bp rise in March was less than 100%, while the market expected a 50bp rise two weeks ago. The Federal Reserve chair said there was a strong tendency to start the normalization cycle with a 25bp rate hike at the next meeting, but excluding the 50bp option at other meetings if inflationary pressures do not subside. I didn’t. He also hinted that the conditions for shrinking the balance sheet would soon become apparent.

Continues this week

The main stats are the February CPI report (released on the 10th). Before the outbreak of the war in Ukraine, there were some signs of slowing inflation. The direct impact was the tightening of energy prices. The car market doesn’t seem to be a bit tight, with February sales down 17% (-26% in December) and car imports recovering in recent months. The price of used cars dropped a little in early February. Producer prices for commodities have also fallen sharply. These favorable developments may not be so significant in the face of rising oil and gasoline prices. Inflation in February is expected to rise 7.8% in a year (+0.3 points in a month).