Credit Suisse says impact of Ukraine war is underestimated, recommends clients 'get more defensive'

Strategists at Credit Suisse believed that the multiple negative feedback loops created by the war in Ukraine had been underestimated, especially as regarded the hit to economic growth in Russia and Europe.

Hence, their recommendation was to "get more defensive".

In a research note sent to clients, veteran strategist Andrew Garthwaite and his team said the hit to Russian gross domestic product might potentially exceed 20%, and that, when combined, the negative feedback loops from commodities, supply chains, financial contagion and the hit to confidence could push European growth down to 1.0%.

Previously, Credit Suisse had penciled-in European growth of 2.0-2.5%, while the consensus had been at 3.6%.

That was even with a fiscal response factored-in.

US economic growth on the other hand was looking better in comparison, with GDP likely only to be hit by 50-100 basis points and to remain "well above" the trend growth rate of approximately 3.0%.

And there was more.

"Historically when real oil or commodity prices have been up this much (relative to the 2-year average) we have had a recession thus even these forecasts could be optimistic," they explained.

Compounding matters, given where wage growth and inflation were, the Federal Reserve was still likely to take interest rates to 2.0%.

In the euro area meanwhile, core inflation was above "comfort levels", wage growth was back at target and the room for fiscal largesse was more limited, unlike the situation before the euro area crisis, Covid-19 or the Great Financial Crisis.