Chance of recession depends on length of Ukrainian conflict warns financial expert

INFLATION was a reality before the invasion of Ukraine, but the war is going to exacerbate it significantly, says Tommy Corbett of Ennis based Carey Corbett Financial Solutions.
“We’ve had inflation for the last 12 months, mainly driven by supply chain side and the disruption of supply chains on goods coming from afar. There was also pent up demand.
“People hadn’t spent money during Covid, and when it was finished they had a lot more money in their pockets and tended to spend a bit more. But from now on what’s happening in Ukraine is going to drive it even further. Things like wheat will come into play and the supply of gas and oil is going to dry up and that’ll drive things even further.”
The rise in petrol and diesel prices is one of the starkest reminders, he feels.
“It’s hitting home when you got to the pumps and see it’s €2 or even €2.14 or €2.15 a litre of petrol or diesel. It really is hitting home. Talking to our business customers, what they’re seeing at the garage side is that people aren’t filling up like they used to, they’re a lot more careful as to how they’re spending and where they’re driving.”
While the prices are at historic highs, he says the retailers actually don’t see much profit, with many of them using the sale of fuel as a means of drawing people into the shops where they buy other items.
“Generally speaking I think the margins (on petrol and diesel) are anything from two or three cent a litre all the way up to maybe seven cents a litre. It isn’t massive, the margins aren’t huge. If it’s €2 a litre and the retailer gets three cents, the margin is 1.5%, which is small.”
However every product sold has to get to market somehow, and increasing fuel costs has a huge impact on the wider economy.
“If the cost of fuel goes up, it drives up the coast of everything. If you’re talking about a loaf of bread, even forget about wheat and the scarcity there’s going to be of that, that loaf of bread has to be delivered, the cost of delivery is going to go up which means the price of the end product will. If you go for a meal in the restaurant, the production cycle is fuelled by gas and oil.”
So are we looking at a recession coming soon? “It’s hard to know. If you look at the clouds that are forming, some commentators are predicting a recession. It all depends on how long this conflict lasts and how widespread it becomes and what types of sanctions are going to be brought on Russia.
“Ireland has bounced back remarkably well from Covid, we were looking at possibly double digit growth this year. That could be in jeopardy now. If I was asked I’d say you’re probably looking at some form of (international) recession, how long that recession will last will depend on how long the conflict will last.
“I don’t know how bombproof Ireland will be against it, I think we’re in a good place, but at the same time all these things have an effect on our economy here.”
In an economic sense, it is harder than ever to read the tea leaves right now.
“There are so many clouds there. Even at the start of the year, before the conflict kicked off you had inflation, the threat of interest rate rises in the US, you had an interest rate rise in the UK, there was so much money around that Central Banks were looking at easing back on their quantitative easing, which is basically buying bonds and giving people money.
“Those things were all feeding into a possibility of a slowdown in the global economy. Now you have Mr Putin doing what he’s doing. It’s really going to test central banks now, do they stop the quantitative easing, do they stall it, do they keep it going, what happens with interest rates. We’re really up in the air at the moment.
“What Central Banks do will dictate whether it’ll mean recessionary times or not, it’ll have a huge knock on effect. It’s hard to predict at the best of times and at the moment its extremely hard to predict what’s going to happen.”
While the economy is uncertain, he says that’s not what’s occupying the minds of most people he deals with.
“There is a financial effect of the war, but really most people’s minds are on the humanitarian side, there are millions of refugees. Talking to clients, finances are at the back of their mind, they’re more concerned about the humanitarian side, which is a nice thing to say.”
At the moment he feels it’s a good time for investors to keep calm and carry on.
”We would concentrate a lot on pensions and investments and we’d have a number of queries at the moment in relaiton to what to do. When these things happen, sometimes the hardest thing to do is do nothing. But if you’re in a multi asset portfolio, if you’ve a pretty diverse portfolio in terms of investment, that’s what you should do, sit on your hands, do nothing, don’t panic and get advice.”

by Owen Ryan