War in Ukraine: Recession in Europe?

The past isn’t a perfect predictor of market behavior, but it has proven to be a useful guide. A long history of geopolitical conflicts, including those involving Russia, have seen stocks recover and post gains after periods of armed conflict during the past 30 years (1991, 2001, 2003, 2014)—except when an economic recession followed (2008).

Europe’s stock market performance around periods of armed conflict

Source: Charles Schwab, Macrobond, STOXX 600 Index as of 3/13/2022. Past performance is no guarantee of future results.

Although these conflicts differed, there were similarities in their economic backdrop and all of them involved major energy exporters. For example, ahead of the conflicts in 1991 and 2001 there were recessions, as we recently experienced in 2020. Oil prices doubled in the run up to the conflict in 2003. Economic sanctions on Russia were applied in response to the wars in 2008 and 2014. The Fed gave us the "taper tantrum" when it signaled tightening ahead of the conflict in 2014.

Recession odds

A key question for investors is: Will the current conflict lead into a recession? In our view, the odds are above average, but still below 50%.

Outside of Russia, the biggest risk of recession is in Europe. Europe’s economy is currently being challenged by higher energy prices and tighter lending conditions in the wake of the Ukraine invasion, due to higher reliance on Russian energy, economic ties, and geographic proximity. Because Europe is a huge customer of products and services produced by companies headquartered in the U.S. and Asia, investors everywhere are focused on this risk of European recession.

Should a blanket ban on energy imports from Russia in all major consuming countries, not merely the U.S., come to pass, it would severely reduce and disrupt energy supply on a global scale, making recession more likely. However, that scenario doesn’t seem likely in the near term; the German chancellor has currently outright rejected the idea of a ban on Russian energy imports to Europe due to the economic harm it would inflict on its economy. Additionally, there seems to be no indication that Russia intends to cut off energy exports—which make up over a third of their gross domestic product (GDP).