Research Briefing
| Feb 23, 2022
How the clash with Russia will affect Europe’s economy
The escalation in the Russia-Ukraine conflict will hit the eurozone economy mainly via higher energy prices giving another spur to inflation, which will affect real incomes. The impact on each European economy will depend on their degree of energy dependence, direct trade, and financial links with Russia.
Research Briefing
| Feb 23, 2022
How the clash with Russia will affect Europe’s economy
The escalation in the Russia-Ukraine conflict will hit the eurozone economy mainly via higher energy prices giving another spur to inflation, which will affect real incomes. The impact on each European economy will depend on their degree of energy dependence, direct trade, and financial links with Russia.
The crisis between Russia and Ukraine continues to dominate the headlines. Although we expect the direct economic impact for the eurozone to be limited, geopolitical tensions continue to put enormous pressure on energy prices at a time when inflation is already at historically high levels, further squeezing household real incomes.
GDP surprised to the upside in Q4 2021 with 1.1% q/q growth, according to the flash estimate. The positive carryover effect has raised our 2022 GDP growth forecast by 0.4ppts to 3.4%. All domestic restrictions were eased at the end of January, in line with our view that despite incredibly high Covid cases, the economic hit from Omicron will be mild and short-lived.
High inflation in the UK and concerns about the effect of a tight jobs market on wages will likely push the MPC to raise rates to 1.25% by the end of 2022. But considering the key role played by global energy prices in pushing up inflation, we think this could turn out to be a damaging overreaction.
The US Recovery Tracker rose 1.4ppts to 96.3 in the week ended February 4, recouping almost all of its losses since Omicron first began to weigh on the economy. Stronger mobility, looser financial conditions, and improving health drove the latest week’s increase, while declines in demand, production, and employment restrained growth.
Our forecast for Finland’s GDP growth is 2.3% this year and 1.5% in 2023, both unchanged from last month. The economy grew 0.7% q/q in Q4 2021, slightly better than we expected, and the Omicron wave is likely to have peaked in several regions with the remaining mild restrictions set to be relaxed soon.
The impact of a “limited” incursion by Russia into Ukraine would deal an unwelcome blow to the European economy via higher inflation squeezing real incomes, but it would be far from a knockout.
