Perspectives : Markets & Economy | March 17, 2022

Key drivers of our current economic assessments

We recently shared our views on potential global economic effects of Russia's invasion of Ukraine. We described a situation where rising oil prices and tighter financial conditions would push growth lower and inflation higher.

Why focus on these factors? And why make our forecasts conditional on their movements? Because in fast-moving, uncertain situations, it's best to acknowledge what we don't know and control for what we do know.

"We're the first to admit that we don't know how the war is going to play out," said Shaan Raithatha, a Vanguard senior economist on the team researching the war's economic effects. "What we do know is that it will affect oil prices, and oil prices will affect global growth and inflation. So, we frame it in terms of oil prices in this range or that range. Similarly, the impact of financial conditions, depending on the scenario, is either going to be X, Y, or Z."

The table below puts forth our views for a range of oil price and financial conditions scenarios.

As oil prices rise and conditions tighten, global growth slows and inflation accelerates

Notes: The table presents just two of the most important factors Vanguard considers related to war in Ukraine—oil prices and financial conditions—and illustrates their expected impact on growth and inflation under four distinct scenarios. Other variables, not depicted, also factor into the analysis. The probabilities shown are as of the date of the analysis and are subject to change.
Sources: Vanguard analysis, as of March 10, 2022.

As the table shows, the scenarios we view as most likely—oil prices settling in around early March levels with limited to moderate tightening of financial conditions (such as increased borrowing costs)—would lead to consumer price inflation remaining elevated in 2022 and economies growing above or below trend but avoiding recession.


Our broad scenarios are global, though we do expect economic effects of the war in Ukraine to be felt more profoundly in the euro area than in other developed markets, given the region's greater energy dependence on and proximity to Russia.


Scenarios make sense today and every day

In contrast to that of some forecasters, our approach acknowledges the significant role of uncertainty, especially in situations of some magnitude. Our focus on oil prices and financial conditions now is akin to our focus on vaccine efficacy and virulence of emerging variants in assessing potential impacts of the COVID-19 pandemic.


"With developments such as COVID-19 and now, unfortunately, the war in Ukraine, we think about economic outcomes in terms of scenarios," said Andrew Patterson, Vanguard senior international economist. "Because of the uncertainty involved, we qualitatively and quantitatively work through multiple potential outcomes and try to assign probabilities to them. Our focus is pointed and situational."


Vanguard doesn't employ scenarios only in the context of history-defining events, however. The approach is just as valuable in the context of more commonplace uncertainty, such as that provided regularly by policymakers and the financial markets. For example, we present our long-term asset-return forecasts within a range of potential outcomes rather than as specific-point forecasts. We also present our optimal portfolios in the context of varying economic environments. (The Vanguard Economic and Market Outlook for 2022 includes both our asset-return forecasts and our optimal portfolios.)


But a scenarios-based approach is clearly prudent for the current challenge. "As we continue to assess developments related to Ukraine under this framework, we will incorporate relevant and timely updates into our perspective," Patterson said. "We took a similar approach during the pandemic, incorporating views on vaccines' efficacy, production, and distribution. We hope to incorporate details of a peaceful end to the war in Ukraine in our framework sooner rather than later."


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