Goldman Sachs: Ukraine Conflict's Limited Impact on U.S. Economy

The economic fallout from the Russia-Ukraine war is projected to be limited for the U.S., as trade ties with the involved countries are minimal and energy price sensitivity is lower compared to Europe.

Goldman Sachs' economic research division highlighted on February 23, 2022, that the U.S. faces fewer direct impacts due to weak trade connections and its status as a net natural gas exporter. Meanwhile, the Federal Reserve's Geopolitical Risk Index has surged to unprecedented levels, signaling elevated uncertainty.

Historically, the Fed has postponed major policy changes during geopolitical crises. However, this conflict coincides with significant inflation concerns, prompting a more immediate need for monetary tightening despite the geopolitical risks.

Key Insights

• The Russia-Ukraine war poses limited direct risks to the U.S. economy but amplifies challenges for Europe.
• Trade volumes between the U.S. and the conflict zones are negligible, and the U.S. exports more natural gas than it imports.
• Financial market tightening and rising business uncertainty represent the most unpredictable economic consequences.
• Given current inflationary pressures, the Federal Reserve is expected to continue raising interest rates incrementally throughout 2022.

Oil Prices’ Influence on Inflation and Economic Growth

Goldman Sachs economists estimate that every $10 increase per barrel in oil prices elevates U.S. core inflation by 0.035% and headline inflation by 0.20%, while slightly reducing GDP growth by under 0.10%. These effects could intensify if geopolitical tensions lead to tighter financial conditions and heightened business uncertainty.

Fed Policy Amid the Russia-Ukraine Crisis

Signs of a developing wage-price spiral and elevated near-term inflation expectations make further commodity price hikes particularly concerning. Consequently, the Federal Open Market Committee (FOMC) is anticipated to proceed with steady 25 basis point interest rate increases in upcoming meetings.

Nevertheless, heightened geopolitical uncertainty has reduced the likelihood of a larger 50 basis point hike in March. As of February 23, 2022, the Fed’s Geopolitical Risk Index reached levels not seen since the 2003 Iraq War.

Three Economic Impact Channels

Goldman Sachs identifies three primary channels through which the conflict affects the economy: trade disruptions, energy price fluctuations, and tighter financial conditions. While these factors affect both the U.S. and Europe, their impact on the U.S. is expected to be more contained.

Since Russia and Ukraine account for less than 1% of U.S. trade, direct trade disruptions are minimal.

Energy price impacts in the U.S. are also expected to be modest. Europe’s heavy dependence on Russian natural gas contrasts with the U.S.’s net exporter status. Although oil markets remain tight, Goldman’s commodity strategists anticipate only moderate oil price increases, noting that shale oil production investment is now less responsive to price changes than in previous cycles.

The most uncertain economic effect stems from potential tightening of financial conditions. Historically, geopolitical crises have seldom triggered significant financial tightening in the U.S., but current circumstances may differ. Should financial conditions constrict and business uncertainty rise, U.S. economic growth could slow.

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