September 29, 2022

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Danske Bank analysts fear that the war in Ukraine will raise prices by up to nine percent within a few months

Danske Bank analysts fear that the war in Ukraine will raise prices by up to nine percent within a few months

After Russia attacked Ukraine on February 24, there was huge volatility in stock markets around the world and great global uncertainty about the future market outlook.

The prices of many of the world’s major raw materials have risen, such as oil, gas, steel, aluminum, wheat, and a number of other raw materials.

Danske Bank analysts believe eurozone inflation could rise from eight to nine percent within two months, which in turn could lead to a decline in purchasing power of about six percent – and in the worst case lead to a recession in Europe.

The commodity markets were under pressure before the war. The Ukraine war is now helping push inflation up sharply, says chief strategist Anders Johansen at Danske Bank.

It all depends on the war

Core inflation, that is, inflation excluding electricity and fuel, ended at 2.1 percent from February of last year to February of this year – while inflation in the United States rose to its highest level since 1981.

Higher inflation figures have increased uncertainty regarding the macroeconomic picture.

Central banks fear hyperinflation, something they haven't had to worry about for a long time.  This means they will be able to get into a situation where they have to choose between hitting the inflation target, or reining in the labor market, says Carrie Deo Andersen, chief economist and head of analysis at Akershus Eiendom.

Central banks fear hyperinflation, something they haven’t had to worry about for a long time. This means they will be able to get into a situation where they have to choose between hitting the inflation target, or reining in the labor market, says Carrie Deo Andersen, chief economist and head of analysis at Akershus Eiendom. (Photo: Fredrik Solstad)

Central banks fear hyperinflation, something they haven’t had to worry about for a long time. This means they will be able to get into a situation where they have to choose between hitting the inflation target, or reining in the labor market, says Akershus Eiendom’s chief economist, Kari Due-Andresen.

It points out that in order to protect the inflation target, interest rates will be raised more than is appropriate for the labor market, which will slow employment growth, but that it must be raised to reduce inflation.

– Everything now depends on the developments of the war. The longer it goes on, says Deo Andersen, the more dangerous it becomes.

Norway will be rich in sugar

Oil and gas prices have risen to record levels. It provides a good income for the Norwegian state.

Even before the invasion, monthly revenue to Norway from gas exports had quadrupled compared to what had been common, says Deo Andresen, who is excited about how this will affect the Norwegian debate going forward.

Given the sharp growth in gas prices, it may seem that Norway’s revenue will continue to rise in the near future. The Norwegian state will be rich in sugar, but the “ordinary people” will have to pay very high prices, and they will also receive increased interest rates. She says the cost of living can be much higher than we’re used to.

Electricity and gasoline prices were not as high as they are now. Gasoline prices have risen 21 percent in the past year, and are now approaching NOK 30 per liter.

Due-Andresen notes that the price increase will tighten many other depreciations.

– It will be interesting to see how politicians deal with this issue in the future, she says and adds:

– Especially with the government of the Red and Green, which took the lead in saying that “the turn of the ordinary people” has now come. The government will face a major interpretation problem in the future if it does not now provide “a little money to the people” in the form of compensation or tax relief, says Deo Andersen.

Tension over interest rate meeting

Throughout the week, there is a new interest rate meeting at the US Federal Reserve, often referred to as the Federal Reserve. The key interest rate is expected to be raised by 0.25 percent.

– It probably won’t have serious consequences for the stock market. Investors will be watching closely what Fed CEO Jerome Powell has to say during the press conference — what comes out there is likely to lead to significant market volatility, as after the previous interest rate meeting, says chief strategist Anders Johansen at Danske Bank. .

He believes that the market will pay special attention to whether the Fed warns that it will raise its key rate more than expected, due to the rising inflation as a result of the war.

There is tension over what Federal Reserve Chairman Jerome Powell will say during the press conference, after next Wednesday's interest rate meeting.

There is tension over what Federal Reserve Chairman Jerome Powell will say during the press conference, after next Wednesday’s interest rate meeting. (Photo: Kevin Lamarck/Reuters/NTP)

There may have been some hope in the market, at the start of the war, that the Fed would be able to raise interest rates more slowly than expected. In the past week, Johansen says, this has become less likely.

Johansen believes that the stock market will react positively if a slower rate hike is announced due to the war, while it will likely not have a significant impact if seven rate hikes are announced during the year.

Johansen believes that the clear message that interest rates will go up as planned, or that a slower rise will be announced due to the war, will be positive for the stock market.

On the other hand, if they are very clear about the concern about the increase in inflation due to the war, and start to suggest that they may have to raise the interest rate by 0.5 per cent once during the year, it could lead to a significant drop in the market. Johansen confirms.

– but they are likely to warn that they will follow closely the development that may lead to changes in the plan they are now laying down. Because there was abnormally high uncertainty due to inflation because everything was high, and because the war was intensifying inflationary pressure in the economy, he says.

Three possible outcomes

Chief Strategist Johansen at Danske Bank has outlined three scenarios for the further development of the war in Ukraine – and how it will affect the markets.

The main scenario is that sooner or later the parties will negotiate a ceasefire, as Ukraine will have to enter into a number of concessions on the ground – which will then be under Russian control.

But Johansen notes there is little prospect of a downsizing in the coming months.

The ceasefire will mean that the commodity markets will gradually calm down and will be in a better equilibrium than today.

He notes that it will be very difficult for Russia to control all of Ukraine, which is the second largest country in Europe, but that they may be left with control of some territory.

The possibility of a guerrilla war breaking out inside the country at that time is high. Johansen says the West will keep sanctions in place against Russia, keep working to modernize Western defenses, as well as continue to make Europe independent of Russian oil and gas.

Serious consequences

The worst-case scenario is that the war extends to several countries in Europe, and there are three potential catalysts that could lead to escalation.

We consider this a low-probability scenario, but not entirely impossible. If a no-fly zone is imposed over Ukraine, new sanctions are considered by Putin as a declaration of war, or more countries get NATO membership, Johansen says, it could lead to a major war.

The most positive Danske Bank scenario for the development of the war depends on the replacement of Putin's leadership with a new regime that is clear that he wants to restore diplomatic relations and trust with the West.

The most positive Danske Bank scenario for the development of the war depends on the replacement of Putin’s leadership with a new regime that is clear that he wants to restore diplomatic relations and trust with the West. (Photo: Sputnik)

This scenario would likely lead to maximum sanctions from the West with, among other things, a complete embargo on Russian oil and gas which would lead to significantly higher energy prices and significant consequences for the Western economy, says Johansen.

The most positive scenario is to replace Putin’s leadership with a new regime that is clear that he wants to restore diplomatic relations and trust with the West.

– Such a scenario is unlikely, and despite this development, it is likely that a number of sanctions will continue, and the damage to the Russian economy will have consequences for some time, says Johansen. (Terms)Copyright Dagens Næringsliv AS and/or our suppliers. We would like you to share our cases using a link that leads directly to our pages. All or part of the Content may not be copied or otherwise used with written permission or as permitted by law. For additional terms look here.

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