Europe is facing a slowdown in growth and higher inflationas the war in Ukraine lowers confidence and pushes prices up, said the President of the European Central Bank, Christine Lagarde, speaking at an event organized by the Central Bank of Cyprus.
“We will face, in the short term, higher inflation and slower growth. “The longer the war lasts, the higher the financial cost and the greater the likelihood of leading to worse scenarios.”
The economic effects of the war are best reflected in what economists call a “supply-side disruption” that pushes upward inflation while restricting growth, he said.
Three, he said, are the key factors that are likely to lead to higher inflation.
“🇨🇾 has repeatedly demonstrated its flexibility & resilience, as well as its ability to turn crises into opportunities. “I’m sure he will do it again.”
Read her speech @Lagarde @ecb at an event of the Central Bank of Cyprus: https: //t.co/5NeVnxn8Yb pic.twitter.com/qUDlit86nT
– EC in Cyprus (@EUCYPRUS) March 30, 2022
First, energy prices are expected to remain higher for longer periods of time and, in fact, gas prices have risen by 52% since the beginning of the year and oil prices by 64%.
Second, pressures on food price inflation are likely to increase. Russia and Ukraine export almost 30% of the world’s grain, while Belarus and Russia account for about a third of the world’s potash production, a key ingredient in fertilizer production, which exacerbates supply shortages.
Third, global manufacturing bottlenecks are likely to persist in some areas. For example, Russia is the largest exporter of palladium, which is the main element for the production of catalysts, while Ukraine has about 70% of the world’s reserves of neon gas, which is absolutely necessary for the construction of semiconductors.
THE warcontinued the head of the ECB, begins to reduce confidence in at least two ways:
First, households are becoming more pessimistic and could reduce their spending. Consumer confidence fell this month to its lowest level since May 2020 and is well below its long-term average.
According to national surveys, households’ expectations for growth have deteriorated, while their expectations for inflation have risen.
This suggests that people expect their real income to shrink (that is, their post-inflationary income). Households are likely to save less and this could absorb some of the disruption. But they have also downgraded their planned spending.
Second, business investments are likely to be affected. According to the latest survey data, business activity remained relatively good in March, but business expectations for a one-year period fell sharply.
Also, the delivery times of the suppliers deteriorated again, reflecting the disturbances on the supply side in the processing sector.
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