Fear in the markets – which is no coincidence that they continue to crash in the stock market – is a convolution scenario: high inflation and low or even stagnant growth at the same time. In terms, stagflation. Central bankers, economists, analysts and market participants are now speaking frankly about it. The rush in oil and gas prices and an increase in raw materials – due to the lack of supplies from Russia and Ukraine of basic elements of industry down to rare earths, from foodstuffs to fertilizers – It affects the entire economic system, starting with the European system. A dramatic phenomenon that actually occurred in the seventies after the oil shock which led to a sharp rise in the prices of hydrocarbons and raw materials and led to a generalized increase in prices while real wages lost purchasing power. And if the United States and the European Union halt oil and gas imports from Russia – as US Secretary of State Anthony Blinken announced on Sunday, March 6 – the pressure on the global economy could be felt even more.
All prices that will affect inflation: For the eurozone, the Bloomberg consensus estimates the price increase in 2022 at 4.2% and for the USA at 5.2%. In the euro area, inflation rose to 5.8% in February and expectations of eurozone inflation for 5 years (a parameter that operators often notice) to 2.27%, the maximum since 2013. In the US, the same coefficient at 2.54%, closed to the maximum since a year 2014, highlights Antonio Cesarano, chief global strategist at Intermonte.
Expectations of the European Central Bank’s actions
A race that doesn’t seem to stop. Just a week ago, it was the Governor of the Bank of Portugal, Mario Centeno (also a member of the European Central Bank) who raised the worst-case scenario, although it was ruled out: I am convinced that the growth attractiveness will prevail only in a scenario close to stagflation that does not exclude the possibilities that We will be able to face it. The war in Ukraine had begun the day before. Now the picture is getting bleaker and that’s why all the market eyes are on at Thursday’s ECB meeting. According to many observers, the tightening of monetary policy will be slowed as European politicians are completely surprised by the war in Ukraine and will be reluctant to make final decisions before the decision is brought to light, Algebris analysts write. The pace of asset purchases can therefore be confirmed at €40 billion per month. Algebris concludes that the risks of lower growth in the Eurozone will result in the ECB not wanting to put more pressure on the system by withdrawing liquidity at this time.
First in Europe, then in the United States
The threat of stagflation began at the end of last summer, Cesarano comments. The war has accelerated the process of slow inflation, that is, a slowdown in growth and at the same time an increase in inflation, which could have happened in the first quarter. Between raw materials, oil, agricultural components and fertilizers, we realized that Russia is important to our economy. Central banks must intervene first. Here, the European Central Bank faces a dilemma: cure inflation and thus raise rates, or cure growth, thus leaving rates low and helping the economy. Today, the supply of oil and raw materials is going crazy due to war related issues and therefore in my opinion, the ECB will favor the growth target. Then, it will be up to governments to step in with the expensive bills, perhaps by extending the terms of the Stability Pact’s suspension. It will be discussed from March 10 to 11 at the EU Heads of State and Government Summit. For Cesarano, this will be not only a European phenomenon, but also the United States: the United States has a few months advantage over the eurozone. On Thursday we will have an update on inflation in February, expected to reach 7.8-7.9% while gasoline exceeded $4 a gallon, the highest since 2008: Even in the United States, the war has amplified and accelerated a phenomenon that already exists, given that there is Talk about stopping the import of Russian oil by about 600,000 barrels per day, or 7% of the total US imports of oil. The Fed said it would start raising interest rates and lowering the balance sheet, but it would have to stop at some point because stagflation would come to them as well.
Estimated decline in growth
French investment firm Carmignac measures the impact of a stagflation scenario: the war in Ukraine could have a negative impact on European economic growth between 0.5% and 2%, with an effect on inflation between +1.1% and +1.7% on an annual basis. For the US, the impact will be smaller, with a contraction in growth between 0.2% and 0.5% and an impact on prices between +0.7% and +1.2% depending on the severity of the scenarios. War and sanctions lead to the risk of stagflation – high inflation associated with an economic slowdown. Shortages in available raw materials can lead to severe disruptions in the supply chain, with serious implications for growth and the attendant effect of price increases. The global economy – Carmenac continues – must face a triple shock: the first relates to international trade, with profound implications for the energy sector but also for basic food products, minerals, fertilizers and air freight transport. The second is related to the uncertainty caused by the collapse of the geopolitical system that arose after the Cold War with risks of escalation and the third is of a financial nature, with the potential for default by Russian and Ukrainian companies and organizations and the domino risk. Impact on other countries.
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