(Repeats Friday's story without changes)

By John Kemp

LONDON, March 4 (Reuters) - U.S. and European economies are facing a heightened risk of a recession this year as Russia’s invasion of Ukraine severely disrupts supply chains and causes inflation to accelerate to the fastest rate since the 1970s.

Yields on U.S. government debt maturing in two years’ time are trading less than 30 basis points below notes maturing in ten years, the narrowest spread since the pandemic erupted worldwide in early 2020.

Yield-curve flattening has been one of the most reliable indicators of an impending recession in recent decades since it measures the current stance of monetary policy relative to long-term interest rate expectations.

The current spread is in the 77th percentile for all months since the start of 1990, up from 58th percentile at the end of December and the 33rd percentile this time last year, indicating an elevated risk of recession.

In the last three decades, whenever the spread has narrowed this much it has heralded either a significant mid-cycle business slowdown or an end-of-cycle recession (https://tmsnrt.rs/3HFAGIr).

Even before the invasion, prices for energy, raw materials, industrial components, consumer products and freight were rising at the fastest rate since the early 1980s.

But the conflict and sanctions imposed in response by the United States and its allies have now sent prices for oil, gas, coal and other commodities surging even higher.

Severe disruptions have been reported in ocean shipping, international passenger and cargo aviation and the global supply chains for chemicals and automakers, among other sectors.

The result is equivalent to a massive loss of global production capacity, a supply-side shock that is simultaneously intensifying inflation while likely to depress output and employment.

Businesses grappling with sanctions, supply chain problems and the rapidly escalating cost of their inputs are less likely to undertake risky investment expenditures.

Households hit by higher bills for gas, electricity, motor fuels, cars and other durable items will have to trim expenditure on other goods and services.

Recessionary forces are intensifying rapidly across North America and Europe as global supply chains are stretched to breaking point.

POLICY DILEMMA

The U.S. Federal Reserve is impaled on the horns of dilemma, trapped between its dual goals to maximise employment and maintain price stability.

The central bank is simultaneously under pressure to raise interest rates faster to restrain inflation but leave them lower to offset the heightened uncertainty arising from the conflict.