Costs of war mount in Europe as inflation soars and growth sags

Bloomberg

The economic damage from the war in Ukraine is worsening across Europe as already-record inflation soars further and Germany faces a danger of recession because of its dependence on Russian energy.
President Vladimir Putin’s invasion has sapped euro-area confidence and sent consumer-price expectations to their highest level since records began in 1985.
In Spain, inflation surged by almost 10% in March — the most in nearly four decades — while advisers to Chancellor Olaf Scholz slashed Germany’s growth outlook and said there could be a contraction if natural gas supplies are shut off.
“The longer the war lasts, the greater the costs are likely to be,” European Central Bank President Christine Lagarde said Wednesday in Cyprus. She reiterated that any increases in record-low interest rates will be gradual, describing “significant risks to growth” and “considerable uncertainty” over the economic outlook.
ECB officials have dismissed talk of stagflation, saying expansion in the 19-member euro zone will still top 2% even in their “severe” scenario for 2022. But the latest data show increasing traction for the forces that would produce such an outcome. What’s more, several policy makers are pushing for a rate hike this year that could weigh on output.
Slovakia’s Peter Kazimir on Wednesday joined a growing group of policy makers saying a rate increase in 2022 is possible. A day earlier, Austria’s Robert Holzmann — one of the Governing Council’s leading hawks — backed two quarter-point moves by year-end.
At its March meeting, the ECB indicated that its primary focus is on tackling inflation that’s almost three times the 2% official target. Investors are looking carefully at prices, reacting to Wednesday’s unexpectedly large jump in Spain by bringing forward bets on the central bank’s deposit rate returning to zero to October from December.
Germany will release March inflation data, with figures already out from individual states signalling another overshoot on the national level. In Lithuania, a preliminary reading showed prices shot up by 15.6% this month.
Everything will feed through to Friday’s inflation number from the euro zone, where analysts predict a new record in the single currency’s history. Looking ahead, energy costs, food prices and persistent bottlenecks “are likely to take inflation higher,” according to Lagarde.
“The best way that monetary policy can navigate this uncertainty is to emphasize the principles of optionality, gradualism and flexibility,” she said.
Some policy makers are calling for record-low borrowing costs to be lifted this year, with money markets bringing forward bets on the deposit rate being raised to zero by two months to October in the wake of the Spanish data.
Spain is poised to be among Europe’s worst-hit economies by the energy shock unleashed by the war, with JPMorgan last week slashing its 2022 economic-growth forecast to 4.2% from 6%.
Soaring fuel costs have prompted truckers in Spain to extend protests into a third week — despite a government offer to grant 1 billion euros ($1.1 billion) of direct aid to the industry.