Economic growth in the EU will be “severely affected” by the disruption triggered by Russia’s invasion of Ukraine, the European Commission has warned. Investor confidence in Germany, Europe’s largest economy, is falling sharply. The multiplicity of problematic macro factors is large and uncertainty about raw materials dominates. “In Europe it will be touch and go.”
Valdis Dombrovskis, the vice-president of the European Commission, let slip this week that economic growth in Europe will be lower in 2022 than the 4 percent seen in recent forecasts. Important in the reconsiderations of the European Commission is the waning sentiment among German market analysts.
The war in Ukraine and the subsequent sanctions against Russia are creating a cluster of economic problems on the continent. Energy prices are rising, the supply of raw materials is decreasing and the ECB is in an increasingly difficult position. This is rapidly increasing the likelihood of a recession, including in our own country.
Analysts expect a recession
The ZEW Institute, an economic research institute in Mannheim, Germany, said that its monthly survey of market analysts and investors recorded the biggest drop in the 31-year history of the sentiment index. The reason: fears that the EU’s largest economy will be hit by a recession and rising inflation levels as a result of Russia’s invasion of Ukraine.
“The war in Ukraine and the sanctions against Russia significantly depress the economic outlook for Germany,” said Achim Wambach, president of the ZEW Institute.
The collapsing economic outlook is accompanied by an extreme rise in inflation expectations, said Mr Wambach. Experts therefore expect stagflation in the coming months, he added.
Oil, gas and metals
For the most important raw materials, oil and gas, the EU is dependent on Russia, for 25 percent and 45 percent respectively. This dependence on Russian fossil fuels is driving up energy prices in Europe.
“That could cause a stagflationary shock,” said Christian Keller, an economist at Barclays.
“Stagflation, the combination of persistently high inflation and a stagnant economy, is in fact where we are now,” said Goldman Sachs strategist Christian Mueller-Glissmann.
A cross-section of experts warn that Europe will be plunged into a deep recession if Russia makes good on its threat to cut gas supplies to Europe.
The EU has plans to reduce its dependence on Russian gas by two-thirds by the end of this year and will completely stop imports by 2030. Moscow said it will retaliate for energy sanctions by cutting off supplies of vital gas more quickly.
Metals such as palladium, aluminium, copper and nickel are also finding it harder to find their way into European industries, with prices rising steadily. Warren Paterson, head of commodities at ING, said these metals are crucial to achieving the energy transition.
“If high energy prices continue, the pace of energy transition will slow down. The logical consequence is that Europe will remain dependent on raw materials from Russia for the time being,” he said.
Taking zero growth into account
If the situation in Ukraine does not improve in the short term, investors will have to reckon with growth coming very close to zero. This is the opinion of Jeroen Blokland, founder of research bureau TrueInsights and former head of Robeco’s multi-asset team. “In Europe it will be touch and go,” he said.
There are many things going on at the same time, Blokland notes. “This week, for example, the Chinese ‘tech city’ Shenzhen was closed down again due to rising infections. If large parts of China are closed down again, we will definitely have a recession. The supply chains, which had just recovered, would then be hit hard again,” Blokland said.
Central banks
Blokland: “The unique thing about the current situation is that central banks have to start tightening at a time when we have already passed the peak of growth and may already be in a recession. Markets can react violently to this.”
The covid recovery will be dented again, and that recovery will take time. “There is less growth, so less profit growth. On the stock markets, that translates into lower valuations,” Blokland said. On the other hand, he sees that the current risk premium on European shares shows that much of the fear has already been priced in. European shares are cheap now.
ZEW index
According to Blokland, there are snags in the predictive power of the ZEW index. “The ZEW is a survey among 350 market specialists. It is therefore much more sensitive to the movements of the stock market. If you take it away at a time when prices are falling, then that has a negative impact on the predictive power of the ZEW.”
The IFO Index, another gauge of the business climate, says more about an approaching recession, Blokland said. In this survey, the respondents are 7,000 companies in the real economy.
ING
“It’s not ING’s base scenario, but the chance of a recession is certainly starting to increase,” said Bert Colijn, senior economist at the major bank. He notes enormous volatility in prices which is reflected in the economic outlook. ”The situation in Ukraine is changing by the day. Forecasting has become a fragile business,” Colijn said.
The ING Economics Department does not expect the Netherlands will enter a recession. Colijn refers to the Purchasing Manager Index, or PMI, a monthly survey of purchasing managers of large companies that assesses economic activity and expectations.
“The PMI indicated a pick-up in economic growth in February. We entered this situation with relatively low unemployment and a strong economic recovery after the pandemic.”
This article originally appeared in Dutch on InvestmentOfficer.nl.