We sit in Australia geographically safe from the atrocities of war and (at least personally) without any real understanding of just how catastrophic this event must be on the people that are impacted both in Ukraine and in the neighbouring countries that are providing support. Australia is a very diverse population, and we extend our thoughts to all of you who have connections with Ukraine.

In a speech on recent economic developments (9 March 2022) the RBA Governor describes the war as a new major risk to the global economy. The rationale for this description appears to recognise that the war is constantly evolving and it remains unclear what the full implications will be. His speech discusses the main economic effects [today] are largely higher commodity prices. As evidence he cited since the start of February European gas price doubling and oil and coal prices up 40%. Base metals and agricultural commodities have also experienced material price rises. We have seen similar rises in Australia. It’s worth noting at the time of writing these increases have continued. 

The scarcity of these basic commodities in Europe is likely to have an inflationary impact at the same time as slowing the economies of most European countries. It stands to reason that these price shifts will be a negative shock to the European economy. However, the Governor indicated the RBA felt it will be net positive to the Australian terms of trade as we are a commodities exporter.

There is very little room for policy error with this war. The International Monetary Fund (IMF) in a statement issued on March 5 argue that while the sanctions on Russia are deemed appropriate the sanctions in themselves have the potential to impact negatively on the global economy in the future.

Whilst it is a note specific to conflict in isolation and does ignore other factors but perhaps as a positive note Dr Shane Oliver AMP Chief Economist reminded us that historically share markets that experience an initial fall due to conflict commencing, when measured a year later, have experienced material gains. We need to remain humble and recognise we do not know the future, but if we have time on our side, and we understand the purpose of the capital we are allocating to risk assets we can take the opportunity to purchase quality assets if/when they become cheap.