The war in Ukraine has contributed to a tightening in financial conditions that will contribute to weaker GDP growth for the rest of this year and next year. Admittedly, a lot of the initial plunges in UK equity prices and gilt yields have been reversed. But the lasting financial market effects from the war in Ukraine so far appear to be higher commodity prices, higher interest rate expectations and wider corporate bond spreads. That’s why UK financial conditions have tightened to levels similar to those seen after the EU Referendum in 2016. While this will weigh on GDP growth this year and next, the tightening seen so far doesn’t pose a systemic risk.
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