Balazs Koranyi

FRANKFURT, Reuters – Europe’s economy is becoming more stressed by Russia’s war against Ukraine. Growth stalls as confidence plummets while inflation soars. This was evident in data and warnings made public Wednesday.

After Russia’s invasion, sanctions have caused energy prices to reach record heights across continents, which has drained confidence and raised the possibility of another recession.

Germany is the largest economy in the bloc and most dependent on Russian energy. The government’s economic council on Wednesday increased their forecast of growth to 1.8%, more than half of what they had previously predicted.

Volker Wieland (one of the panel members) stated that “the risk of a recessive is significant”. He also said it would take the economy until the third quarter of this year to recover its pre-pandemic size.

The government’s forecasts are guided by the advices.

As the government triggered an emergency plan for possible gas rationing should supplies from Russia be disrupted or stopped, Wieland said Germany should work to end its dependence on Russian energy, possibly through a longer-than-anticipated nuclear energy programme.

He stated that this would cause inflation to rise temporarily but increase the stability of the economy and long-term security.

Christine Lagarde, President of the European Central Bank, warned that Europe’s economy may suffer from the war on terror.

She stated in a speech that the longer the war goes, the more expensive it will become and the more likely we’ll end up with worse outcomes.

Vienna’s Austrian central bank announced that it had cut its growth forecast for 2018 and sharply increased its inflation outlook this year. They said their new projections would make the situation worse if there was more war.

STAGFLATION DILEMMA

Lagarde stated that households are already more pessimistic, and that businesses may soon put off investing.

A sentiment indicator that indicated the war has sent inflation expectations and consumer confidence to new lows was used to support her warning.

According to the European Commission, March’s economic sentiment index declined to 108.5 from 113.9 in February. In contrast consumer confidence fell to -18.7 in comparison to -8.8.

Inflation, which has been reducing consumer spending power and prompting governments to offer subsidy to some extent, is the most damaging factor to confidence.

Spain was one of the biggest economies within the bloc. The pace at which inflation rose to 9.8% from 7.6% in February is the fastest since May 1985.

Meanwhile, German price growth exceeded expectations and reached 7.6%. It is a record high that has not been seen since early 1980s. These numbers suggest that Friday’s reading in the Euro zone will be almost double economists’ forecast of 6.6%.

Chris Scicluna of Daiwa Capital Markets said that the inflation numbers are “absolutely whoppers” and had a big surprise.

Lagarde’s ECB finds itself in a difficult situation due to stagnant growth combined with high inflation.

The central bank normally increases its inflation policy, but such an action could worsen the recession and further hurt consumers.

Lagarde, in order to mitigate this risk, promised that she would only move slowly and make no longer-term promises.

“Gradualism is a way to move with care and change our policy as we are given feedback,” she stated.

This policy dilemma could lead to further divisions in the ECB’s rate setting Governing council. Conservatives already call for a higher inflation-fighting hike.

Peter Kazimir, ECB policymaker, stated that unless…the war…becomes a worldwide conflict then I believe the first increase (of rates), could occur towards the end this year.