At times like this, when the emotions of sadness and anger are dominant, it is inevitably difficult to focus on matters economic. But there is no doubt that the dreadful events in Ukraine are casting a heavy shadow over the global economic – and indeed financial – outlook, especially as the impact of war and sanctions interacts with the continuing effects of the pandemic and Brexit.

This will all make 2022 an incredibly difficult time for economic policymakers, even if the invasion of Ukraine comes to an end in the near future and miraculously does not lead to further conflict elsewhere.

The nub of the economic problem is that global and UK growth will be decelerating once more while inflation pressures escalate – again.

This is all happening while gross domestic product in most nations and regions of the UK remains below pre-pandemic levels. The exception, from the data for the fourth quarter of 2021, is Wales. Scotland remains in the lower reaches of the league table, with GDP still a full five per cent below that previous peak.

The escalation in inflation is, of course, caused by the further jump in energy prices, with both oil prices – as measured by Brent crude – and natural gas futures shooting up once more. Even coal prices are now rising sharply. In the UK, Ofgem’s price cap will delay the inevitable surge in gas and electricity prices; but the oil price increase will feed through to prices at the pumps within a couple of weeks.

The level of inflation, as measured by the consumer price index, could rise by an extra 2.5 percentage points due to these increases in energy prices.

This will take annual CPI inflation to some 8% or 9% in the second quarter of 2022, dramatically above the Bank of England Monetary Policy Committee’s 2% target.

How far and how fast inflation then falls back will be primarily contingent upon the trends in energy prices; and these in turn will depend upon unpredictable events in the international arena.

The combination of major inflation risks and high uncertainties will inevitably give the MPC pause for thought, as is evident from recent statements from the Bank’s Governor. He is still calling for restraint in wage and price setting.

However, there are two other impacts of inflation that need to be taken into account. First, higher inflation will result in a massive squeeze on real (i.e. taking account of inflation) incomes. It is estimated that real incomes will drop by as much as 2% on average this year.

That would be the biggest annual fall since the end of the Second World War. Further, this squeeze will fall disproportionally on the lower income groups, exacerbating the effect of pending tax and National Insurance changes.

The second impact will be on the performance of GDP. The squeeze on incomes will decrease consumer demand and GDP growth will fall back sharply as the squeeze bites.

We will therefore face an excruciating combination of high and hard-to-predict inflation, slowing post-pandemic recovery and enhanced inequalities. Pity the poor policymaker!

The UK Spring Statement is on March 23. The Monetary Policy Committee announces its next decision on interest rates on March 17.

The Chancellor will face real challenges – given the perceived need to keep reducing the public sector deficit, as rising inflation hits the costs of Government spending, while at the same time mitigating the effects of the squeeze on real incomes.

A logical package might involve one-off taxes on energy companies and others receiving windfall gains from rocketing energy prices; plus some short-term and heavily progressive income and/or wealth taxes to permit increased support for those on the lowest incomes. But nobody would bet on either move!

The MPC will have to decide whether to hike rates once more, and if so whether to do so by more than one quarter of one per cent.

Given that there is no April MPC meeting, the optimum outcome might be a quarter-point increase, along with an indication that further rises will be limited while the downside risks to the over-arching economy remain.

As one sage pundit has said there is a big risk of the MPC doing too little but an even bigger risk of the MPC doing too much. The committee members should remember that a number of recessions in the past 50 years have followed rapidly after steep increases in energy prices.

Now is the time for thoughtful policies from both Chancellor and Monetary Policy Committee. We shall see if wisdom prevails over conservative orthodoxy.

Meantime on the Scottish domestic front the Finance Cabinet Secretary has issued a ‘National Strategy for Economic Transformation’.

This is thoughtful, if not jam-packed with new ideas. However, a renewed focus on encouraging entrepreneurialism and supporting the creation and upscaling of more businesses in Scotland merits attention.

At the same time it is perplexing that a country (Scotland) with “more top universities per head of population than any country in the world” and “in the top quartile of OECD (Organisation for Economic Cooperation and Development) countries for higher education R&D [and] the percentage of the population with tertiary education” still faces “long-term challenges” like “weak productivity compared to international competitors” and “a relative lack of new business growth”. Answers on a postcard please.

The attention for now must focus on the UK policy level, but Kate Forbes’s paper does draw our attention again to the key dilemmas regarding Scotland’s longer-term economic performance.