Economic Commentary Autumn 2022

forest in autumn

22 April 2022

Headlines continue to be dominated by the horrific war in Ukraine and the terrible humanitarian crisis unfolding.

The grave implications of the Ukraine conflict quickly fed through into increasingly volatile financial markets, with share markets declining and bond prices also generally falling over the quarter.

What dominated the news?

The following news summary is not intended to explain the markets’ performance in the quarter, but to provide some perspective about what dominated headlines:


  • Chinese market negatively affected by renewed Covid-19 outbreaks and lockdowns in major cities
  • Bond yield surge as US inflation rate jumps to a 40-year high of 7%
  • Eruption of the volcano on Tonga triggers widespread tsunami warnings
  • Russia moves troops close to the border with Ukraine amid invasion fears
  • US S&P 500 posts worst January performance since 2009


  • Russia begins a full-scale invasion of Ukraine, triggering western sanctions
  • Brent crude prices top $US100 for the first time in eight years
  • UN report warns global warming outpacing efforts to protect humanity
  • Reserve Bank of New Zealand (RBNZ) raises rates for the third time since October, RBA opens door to hike
  • Millions of refugees flee Ukraine as Russia bombards major cities


  • International criminal court starts probe into possible war crimes in Ukraine
  • NZ police break up three-week anti-vaccine mandate protest in Wellington
  • Conservative Yoon Suk-Yeol narrowly wins South Korean Presidential election
  • Federal Reserve raises rates for the first time since 2018; flags six more in 2022
  • US President Biden, in Poland, warns Russia’s Putin cannot remain in power

From an economic point of view, Russia only represents 1.5% of global GDP so the direct impact on global growth is minimal. Businesses with direct links with Russia will be impacted as will investors whose portfolios were overexposed. However, commodity prices soared as Russia is one of the larger producers of several essential commodities, including wheat, iron ore, coal, oil and gas. Ukraine is an agricultural powerhouse and a significant global exporter of wheat, corn and sunflower oil. The conflict impacts supplies from both countries, magnifying existing supply chain disruptions and adding further unwanted impetus to surging global inflation.

Market turbulence, as unpleasant as it is, will eventually ease. In fact, to the extent that lower share prices now imply a higher expected return for owning shares, current market prices could eventually be regarded as a buying signal for long-term investors.

Whatever the markets may have in store for us in the coming months, heightened market volatility looks set to continue for some time to come. While it is undoubtedly a challenging period for investors, this financial turbulence pales insignificance compared to the devastation and heartbreak being experienced by the Ukraine people and their friends, families and loved ones worldwide.

Inflation Outlook

Inflation has risen sharply over recent months, and what was initially projected to be a transitory phenomenon has become much more widespread and persistent. Disturbingly, there are even signs that the recent acceleration in rising prices is increasingly being seen as the new norm.

That represents a real dilemma for policy makers. With inflation already much higher than forecast, central banks (including the RBNZ) have been backed into a corner. They are now having to prioritise policy measures aimed at containing inflation. The primary tool at their disposal to achieve this is to raise interest rates.

The repercussions of this are already apparent in New Zealand, with the Official Cash Rate (OCR) raised four times (by a total of 1.25%) since 6 October 2021 (as of 13 April 2022). With domestic interest rates already on the rise and debt servicing costs rising, this exacerbates the cost-of-living challenges many New Zealand families face.

In a world still trying to consolidate after the last two Covid-impacted years, the immediate outlook for economic growth suddenly looks more fragile. While this adds to uncertainties in the short term, investors should still be comforted that capitalism has a way of figuring out how to survive and thrive, even in challenging environments.

We can be comforted that markets react significantly faster than economic indicators. The fall in share prices, seen during the recent volatile period, resulted from market participants demanding a lower price for the known risks involved in these investments. This uncertainty and bad news have already been priced in, and as we ease through this challenging period, we can – pending further surprises – expect our investments to deliver positive returns even if the economy is somewhat subdued.

Central Bank Policy

After more than two decades of successfully implementing monetary policy to manage inflation within a low and narrow band, central banks are now compelled to ensure inflation expectations don’t suddenly become unanchored.

However, this action is likely to have negative implications for economic activity. Central banks have become more determined to remove economic stimulus in recent weeks. Despite acknowledging the many uncertainties within the economic outlook, including the Russian invasion, and the impact that tighter policy settings will inevitably have on growth, inflation has become too high for comfort.

The European Central Bank surprised markets during the quarter by presenting plans for a faster-than-expected reduction in their bond-buying programme. Their policy response suggested their concerns about inflation prevailed over all other considerations, including the war in Ukraine and the deteriorating outlook for economic growth.

The New Zealand situation is particularly acute. With inflation expectations above the Reserve Bank’s 1% to 3% target band and inflation itself still yet to peak, the bank is expected to progressively move the OCR to almost 3.5%; shown by their 50 basis point increase at their April monetary policy review.   Unfortunately, this could be akin to slamming the economic brakes on if delivered completely.

Consumer and business confidence is already at rock bottom. Household cash flow is reduced by negative real wage growth, high inflation, and the sharp rise in mortgage rates. New Zealand house prices have become ‘wobbly’ over the past three months, and sales-to-listings data suggests a period of housing market weakness could lie ahead. Together, these factors make a compelling counter-argument for why the RBNZs projected tightening cycle may not be able to be delivered completely. For now, this is the outlook anticipated by markets.

Is Food the New Gold?

Beyond the immense human suffering, the war in Ukraine and the sanctions imposed on Russia create broader issues related to global food production and supply.

At one end of the spectrum are countries with a significant dependency on essential commodities (including mineral products, chemicals, metals and soft commodities) imported from Russia and Ukraine.

On the opposite end, there are countries, many of them emerging markets, that could potentially position themselves to fill this gap by exporting more at higher prices.

Food prices and food availability will increasingly be a global economic and political issue. For example, the expected decrease in food production due to reduced spring plantings in Ukraine quickly lifted global wheat prices by over 15% since the start of the war.

Higher grain prices will disproportionately impact low-income countries, particularly some countries in Africa, and even India, where spending on food makes up a relatively high proportion of their income. Pressure will mount on these countries to either find alternate sources of supply or ramp up their domestic production.

But, as Russia and Ukraine had been significant suppliers of fertiliser to the world, ramping up production, even by other agricultural powerhouses, may be easier said than done. For example, Brazil, which is currently the leading exporter of soybeans, corn, sugar, meat and coffee, imports about 80-85% of its fertiliser needs, with almost a third of this coming from Russia, Belarus and Ukraine. Whilst Brazil is now launching a national fertiliser plan to reduce its dependency on fertiliser imports, this will likely take several years to make a significant difference.

And even if other regions recognise an opportunity to step up their own food production to fill the void, it can take considerable time to plan, sow, grow and harvest meaningful replacement crops. Quickly replacing the 40 million metric ton supply of Ukrainian wheat would be an astronomical feat.

What Can We Do?

Maintain perspective and stay patient.

Uncertainty is a constant. We don’t know what the weather will be like next week, and we certainly don’t know what might happen to change the current conflict in Ukraine, global travel and trade, supply chain pressures, concerns about inflation or the ongoing evolution of Covid-19. But we do know that these unknowns are factored into market prices.

Though we may not know when or how, history tells us categorically that conflicts always end, pandemics run their course, consumerism and trade generally flourishes (on average), and inflation is more commonly able to be controlled within targeted ranges.

We don’t see anything in the world to suggest that this time is any different.

While the returns this quarter have been poor, they (thankfully) bear no relation to the returns of the comparable quarter in March 2020 when Covid first occurred in the world.

It is useful to look back at that time because the best strategy then was the same as it is today – ‘don’t panic and stick to your plan’.

We can quickly see the outcome of that approach from the table below:

The third column shows how three key market indices performed (in total returns in their local currencies) during that awful first quarter in 2020.

The fourth column shows the performance of those same indexes over a longer period (note: this longer period includes both the dismal returns in the first three months of 2020 and the poor returns in the recent quarter).

Over the months ahead, we will see news reports catastrophising the effects of war and inflation. While there may be real challenges ahead, we need to remain calm and stay invested during this period of heightened market volatility. 

This is a time to be in touch with your adviser to ensure you are comfortable with your financial plan and investment strategy.

Article provided by Consilium.

Information as at 22 April 2022. This article is general information and does not consider your financial situation or goals and does not constitute personalised advice. Please contact your financial adviser for advice specific to your situation. There are no warranties, expressed or implied, regarding the accuracy or completeness of any information included as part of this article.

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