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Ukraine: The "ghost" haunting the European economy

Featured Ukraine: The "ghost" haunting the European economy

The European and world economies are facing the risk of stagflation (stagnant inflation) due to the war in Ukraine. Big increases in the costs of energy, raw materials, goods, food and transport are creating the conditions for a new big jump in inflation at a time when sanctions and inflation are threatening the economies, which were trying to recover from the big problems caused the pandemic.

This situation seriously complicates the work of governments trying to support their countries, but also of central banks trying to balance the tightrope of high prices and low economic activity.

Oil has even surpassed $ 130 a barrel, while gas prices in Europe have even reached 350 euros per megawatt hour. Flour prices are skyrocketing as Ukraine is one of the largest producers in the world with crops already hit hard, but also unable to be transported.

Copper, palladium, nickel and other metals and raw materials have reached new heights. The same is recorded in a series of food stuffs. The risk of stagflation similar to that of the 1970s, when households and businesses were hit hard by the jump in inflation and low demand, is now visible, according to data from Bloomberg and the Wall Street Journal.

The question that arises is whether the economies will experience stagflation or another recession just two years after the pandemic brought about the biggest slowdown in economic activity in decades. Europe, which depends on Russia for about 40 percent of its gas needs, is at particular risk, although the US and Asia are not invulnerable, according to a Bloomberg analysis. Economists at Barclays Plc and JPMorgan Chase & Co are among those who cut global growth forecasts and raise them for consumer prices.

Both expect lower growth and higher prices than in the past. "Rising commodity prices and the heightened risk aversion caused by the Russia-Ukraine war are causing a stagnant inflation shock," Barclays economists led by Christian Keller wrote in a report. "While Europe looks more vulnerable than the US and Britain is somewhere in between, China seems less exposed," according to Bloomberg.

Constant shock

Analysts at Goldman Sachs Group, on the other hand, estimate that a continuing shock to the oil price, which will be increased by $ 20, will reduce the gross domestic product by 0.6% in the euro area and by 0.3% in both USA as well as China. A halt to gas supplies through Ukraine could cut eurozone GDP by 1%, while a complete loss of Russian gas would deal a 2.2% blow to the eurozone, the investment bank said.

They also believe that a complete blockade of Russia's oil exports of 4.3 million barrels per day to the US and Europe, would reduce world GDP by 3 percentage points. The International Monetary Fund, for its part, warns of "very serious" economic consequences from the war.

At the heart of the latest period of uncertainty is Russia, the 11th largest economy in the world and a huge energy supplier to much of Europe. Western nations have in recent days imposed the most sweeping economic sanctions on a major country, in decades. Russia's attack on Ukraine pushed oil prices well above $ 100 a barrel for the first time since 2014.

Christopher Smart, a former adviser to President Barack Obama at the US Treasury Department and the National Security Council, told the WSJ that the current economic and business uncertainty is reminiscent of the one that led to the collapse of Lehman Brothers in September 2008. "We do not have "He has never seen anything so complete, so powerful and so sudden imposed on an economy of this size and (so) important to the world economy," he said.