Anti‑Goldilocks: Key Takeaways From the Cyclical Outlook

Russia’s invasion of Ukraine, the sanctions response, and the gyrations in commodity markets cast an even thicker layer of uncertainty on what already was an uncertain economic and financial market outlook before the onset of this horrific war.

In our March 2022 Cyclical Outlook,Anti-Goldilocks,” we discuss the wide range of possible scenarios and the potential for nonlinearities and abrupt regime changes in the economy and financial markets. This blog post summarizes our views.

Economic outlook: a radically uncertain environment

Despite the many unknowns, we draw five main conclusions regarding the cyclical six- to 12-month outlook that we think are most relevant for investors at this stage. (We share three conclusions here; read the full essay for the remainder.)

1) An “anti-Goldilocks” economy – The global economy and policymakers are confronted with a stagflationary supply shock that is negative for growth and will tend to push up inflation further. To be sure, this “anti-Goldilocks economy” – an economy that will be both too hot in terms of inflation and too cold in terms of growth – is not part of our tentative base case forecast, which still calls for above-trend growth and a gradual easing of inflation pressures from higher peaks in developed market economies overall. However, the risks of higher inflation and lower growth or even a recession have increased.

2) Nonlinear growth and inflation responses more likely – The outlook for both growth and inflation is clouded by potential nonlinearities related to already fragile initial conditions. Supply chain disruptions were already widespread due to COVID-19, weighing down output and pushing up costs and prices in many sectors. Russia’s war in Ukraine and the sanctions responses have led to further disruptions. Moreover, the recent COVID-related lockdowns in parts of China have the potential to create new bottlenecks in the global supply chain.

3) Asymmetric shock begets greater divergence – The war in Ukraine will likely lead to a greater dispersion of economic and inflation outcomes among countries and regions. Europe will be most affected, while the U.S. economy appears relatively isolated from the direct effects of the war in Ukraine. China and most other Asian economies have smaller direct trade linkages with Russia but will likely be negatively affected by higher energy prices and slower growth in Europe. In emerging markets (EM), exporters of commodities should benefit, though higher commodity prices will tend to increase already high inflation pressures in most EM economies.

Investment implications