European economy disrupted by war

The effects of the Ukraine conflict spread quickly across Europe, disrupting already strained supply chains, undermining consumer confidence and sending raw materials and energy prices soaring. The lifting of pandemic restrictions on Europe’s services sector eases tensions. However, economists expect this positive effect to fade. The war will weigh heavily on growth, as high energy costs push up consumer prices.

On March 24, the United Nations Conference on Trade and Development (UNCTAD) lowered its forecast for economic growth for this year, due to the impact of the Ukraine crisis. The organization estimates that the global economy will grow by only 2.6%, compared to a previous estimate of 3.6%.

Most of the decline will occur in the euro zone, where UNCTAD saw growth of 1.7%, half of its previous estimate. With that, they lowered their forecast for the US, with GDP likely growing only 2.4%, down from 3%.

S&P Global on Thursday also released the euro zone purchasing managers’ index (PMI), a key gauge of manufacturing and services activity, which fell to 54.5 in March from February’s 55.5, a PMI above 50 indicating growth.

However, many European countries rely heavily on Russia for their energy supplies, including oil and natural gas transported by pipeline. Energy prices have been increasing since before the Ukrainian conflict. And from February 24 – when Russian troops entered Ukraine, prices continued to rise on concerns about supply disruptions in the coming months.

As a result, euro zone businesses recorded the strongest increase in costs since 1998. In response to this, businesses decided to increase the prices of their products and services.

“The war has exacerbated the pandemic-related price pressures. This is sure to push consumer prices higher in the coming months,” said Chris Williamson, chief economist at S&P Global.

The war has also dealt a blow to consumer confidence in the region, according to the results of a survey released by the European Commission on March 23. The survey showed a decline in confidence in March compared to early 2020 – when the pandemic first emerged.

S&P Global said that European automakers were among the hardest hit in the first weeks of the war. The conflict has led to shortages of some parts made in Ukraine, leading to production shutdowns at several factories across Europe. However, those supply bottlenecks appear to be easing.

“Due to the improving parts supply situation in the short term, Volkswagen may increase production at its Zwickau & Dresden (Germany) plant next week sooner than planned,” a group spokesman said. Zwickau is currently Volkswagen’s main electric vehicle manufacturer in Europe.

The European Central Bank (ECB) also lowered its eurozone growth forecast for this year to 3.7% from 4.2%, assuming the energy supply disruption and confidence downturn are temporary. Timing and global supply chains are not significantly affected.

However, they acknowledged that the damage from conflict could still be greater. Cuts in Russia’s natural gas supply could slow growth to between 2.5% and 2.3%.

Earlier this month, the ECB said it would reduce its government bond purchases over the next three months and could end it completely by September to control inflation which had already hit 5.9% in February. The policy stressed that it would flexibly respond to economic developments in the coming months. , instead of following a predefined route.

“The current extraordinary uncertainty means we have to be modest about the accuracy of our forecasts of the economic future,” said Frank Elderson, ECB Valuation Specialist, on March 24.

The ECB said it could raise interest rates “temporarily” after it stopped buying bonds. Meanwhile, the US Federal Reserve (Fed) has signaled that it is likely to raise its key interest rate six more times this year.

However, UNCTAD warned that tightening monetary policy too quickly in rich countries could cause global growth to slow faster than expected and threaten the solvency of some developing countries. The organization said there was little sign that rising inflation was pulling wages up. At the same time, rising borrowing costs will not solve supply chain problems, which is part of the cause of price increases.

“We don’t believe it will work. You can’t fix that problem by raising interest rates,” explains Richard Kozul-Wright, UNCTAD’s head of globalization.

An session (according to WSJ)

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