The Russia/Ukraine conflict is a central focus for us. Obviously, there’s a great deal of human suffering. Clearly, the military side of things is very serious, with significant sanctions on Russia and a great deal of physical damage occurring to Ukraine. The resolution, quite frankly, is unclear as it stands right now. But I can make perhaps a few comments of an economic nature with relevance to the medium and the long run.

And so from a medium-term economic perspective, there was a lot of economic damage naturally occurring in Ukraine and Russia in particular. In Ukraine, it’s the physical damage. In Russia, it is the sanctions that are being applied to the country. There’s also quite material economic damage to Europe. That’s largely via the commodity price channel. There’s some damage as a result to the rest of the world as well, also via higher commodity prices. And so this is something with a significant bearing on our economic forecasts and we have had to pull those down somewhat in response to these developments.

I can also say that over the truly long run, there are a number of important developments I think that emerge from this war as well. And so the most obvious observation is that the Cold War is back between Russia and the West, and that likely entails more military spending.

We’ve seen Germany in particular make commitments on that front, bigger fiscal deficits to fund that military spending and to support economies as needed with commodity prices high. Cold Wars and those levels of conflicts generally engender cliques of countries and the diminishment of international institutions. And all of that is fairly bad for global trade and it’s not great for global growth. So we think that there is at least a slightly dimmed long-term economic outlook in addition to the very acute implications in the short run.

Oil prices are now extraordinarily high, largely because of uncertainty around just how much of Russia’s ample energy production will be disrupted by sanctions or by Russia’s decision to withhold any energy, and so a shortage could well ensue. And so there’s a scramble right now to secure other sources of energy.

And in the short run, U.S. shale oil is expected, in part, to come to the rescue. There may be some scope for OPEC members to help. In particular, Iran and Venezuela are being targeted as countries that could produce more. We’re seeing, in a broader energy context, the pursuit of other sources of electricity. In Germany, for instance, coal plants very likely to be used to a greater extent. And so the scramble in the short run is just to find more energy of some description and it has not been sufficient so far to bring energy prices back down.

I think over the long run, we might well expect more green energy to emerge from this development. And so Europe has made very clear it would like to achieve a degree of energy independence from Russia, and perhaps in general, it believes green technologies are the solution. And so we will see more investment and expansion of that capacity I think.

There is also nothing like a period of high energy prices to encourage energy conservation, to encourage the development of new and better green technologies, and to invest in greater green capacity in general. And so I think that will be a long-lasting consequence of these high energy prices.

And I should also acknowledge high energy prices are bad for economic growth, as are prospective shortages of other key commodities, including wheat and grains and potash and aluminum and a number of other more niche commodities that nevertheless are central to the global economy.

And so there is some damage that comes from that, particularly for Europe, which is most reliant on Russian exports. But, to an extent, globally, Canada may be a little bit less though, to the extent Canada produces a lot of the commodities in short supply elsewhere in the world.

Inflation is already the highest we’ve seen in 40 years. It’s in the 6% to 8% range, depending on the country in question, and so extremely high and certainly an unpleasant and undesirable situation.

Let me start by saying I don’t think this is a forever development. Over the long term, we do continue to expect inflation to fully normalize back to much more familiar 2% type of readings, and probably the best argument in favour of that is the demographic one, which is just that as countries get older, they generally experience deflation as opposed to inflation. So we think that will help to pull inflation back to more familiar levels. But that’s just the long-term story.

I should say as well we don’t think that inflation this time, this bout of high inflation, has to play out like the 1970s when it proved to be quite enduring for the better part of a decade. And there are some important differences versus the 1970s. One of those would be that populations were young and dynamic then and a little bit less so now, and so that helps to hold inflation down.

But also the 1970s had just ended the gold standard, which introduced a lot of chaos into inflation. There were higher unionization rates then which allowed inflation to be embedded into wage contracts and those sorts of things. And there were several major negative supply shocks in the 1970s.

And I will concede there is now at least one major negative supply shock now which is the removal of a certain amount of Russian exports, but we still think most of the high inflation we’re seeing today is actually a positive demand shock; people just buying more things than normal. And as we look forward, there is reason to expect that to edge lower, we think, over the span of the year.

And so the situation we’re in right now of very high inflation probably gets a little bit worse as opposed to better as these increases in commodity prices bleed their way through, but I will say, we think inflation becomes a bit less high thereafter and we do expect some improvement to certain elements of supply chains.

We have central banks beginning to raise rates, which takes a little bit of heat off as well. I think it’s just that the commodity spike will obscure all of that over the next several months. But inflation – less high we expect a year from now.

The risk of recession has definitely increased in recent months and I should say we felt, even going into 2022, that it was set to be, shall we say, a tricky year to the extent it is the year in which central banks are beginning to raise rates; it’s a year in which some fiscal supports are fading; it’s a year in which the natural buoyancy of growth is diminishing a bit, for good reasons as the economy approaches normal, but nevertheless, a bit less buoyancy; and also because we did that geopolitical risks were elevated.

So that last comment has proven more true than almost anyone imagined as of a few months ago. This war in Ukraine does undeniably further diminish the economic growth outlook, and it also adds to the inflation outlook. It adds, for that matter, to the level of uncertainty in general.

And so let me say when we look at econometric models of recession risks, they’re actually still fairly tame. Most of those models still say the risk is no more than about 10% for the coming year.

We were saying, even at the start of the year, we thought it was a little bit higher than that, and I would say with this reality of a war between Russia and Ukraine, the risk has again gone somewhat higher. And so I would say the risk is greater than 25% of a recession over the next year, but still well short of 50%. Just to be clear, it’s not at all our base case scenario.

And framing that a little bit differently, I can say our business cycle analysis argues this is a mid-cycle moment. And so to elaborate on that, that means the cycle has advanced with unusual haste over the last few years. It’s no longer in the particularly early going. It could be that there are only a few years of expansion left if the cycle keeps moving at this rather rapid rate, but it does still argue that growth is more likely than not for 2022.

So we think the expansion continues. The recovery can continue within a diminished state. But the recession risk is higher than usual and perhaps even north of 25%.

2022 is clearly the year of tightening central banks. We haven’t had that in a number of years. It’s all set to begin at once. And, of course, the motivation behind that is that inflation has risen more than enough to warrant central bank tightening. Economies have made sufficient progress toward normality as well, and so it does appear that short-term interest rates are not just rising but set to continue rising.

And the Bank of Canada has already acted for those very reasons; response to high inflation in an economy they believe is now in the realm of its full potential. We have the U.S. Federal Reserve now getting underway as well. And, in fact, there are quite a number of central banks around the world in a similar position beginning to raise rates off very low pandemic-induced levels. And that’s truth both in the developed world and among emerging markets as well. Really only China is an exception at this point in time. But a lot of central banks are raising rates.

I would say the risks are arguably elevated. This tightening cycle with regard to growth, just in the sense that central banks are scrambling a little bit. They realize in retrospect maybe they should have been going a bit earlier just given how high and persistent inflation has become. So there’s a sense of urgency there.

They are responding more to high inflation than to high growth and so that’s the less optimal reason for raising rates. And they’ve indicated that those of them that printed money and bought bonds are set to be selling those bonds at the same time as they raise rates. So they’re doing a whole lot of things at once.

So the risks are higher than usual on that front, I think. But I should emphasize, when you plug these things into a proper economic model, four rate hikes in 2022, let’s say, are set to subtract around 0.5 percentage point from economic growth. And so this is significant, but nevertheless, not the kind of thing that by itself should induce a recession.

Inflation should be a little bit less high as a result of this tightening, though the main determinants of inflation can be found elsewhere in the form of supply chains and sanctions. So don’t expect miracles on that front.

And naturally, of course, higher interest rates do cool housing to some extent, but keep in mind at the same time, we’re in a structurally low interest rate environment. There’s a limit to how far central banks will go from here and so a limit to how much cooling the economy should expect from interest rates.