As cost of living soars, why is war in Ukraine hitting Europe’s economy so hard?

The EU27 and eurozone economies had been on a path of strong recovery and growth coming out of the pandemic, but the EU has recently cut its forecast for growth and hiked its inflation forecast.

Economic impact

A new surge in energy prices, linked to Europe's dependence on Russian energy is driving inflation to record highs.

Ukraine and Russia produce almost a third of the world's wheat and barley and are major exporters of metals. Disruptions to these supply chains as well as rising costs for many raw materials have pushed up the cost of food and other basic goods and services.

This puts a strain on businesses and less money in consumers' pockets. The EU has therefore cut its economic growth forecast: real GDP growth in both the EU and the euro area is now expected to reach 2.7 percent in 2022 and 2.3 percent in 2023, down from 4.0 percent and 2.8 percent (2.7 percent in the euro area), respectively, from the winter 2022 interim forecast.

Inflation - forecast at 3.9 percent just a few months ago - is now expected to average at 6.8 percent.

The cost to Germany

The war is hurting some EU economies more than others. Germany’s growth forecast is one of the lowest in Europe at 1.6 percent. 

Germany’s Mittelstand, or mid-sized companies, are its economic backbone. But this eco-system of local firms is also heavily dependent on neighbouring countries, including Ukraine.

Five kilometres -that’s the average length of cables inside your car. And if your car is made in Europe - about seven percent of that comes from Ukraine.

Guillaume Desjardins 

Euronews

In 2021, the European Union imported 760 million euros-worth of Ukrainian cable. Most of that went to the car industry, but the aerospace sector is also reliant on it.

While Rocket Factor Augsburg (RFA) doesn’t get its supplies directly from Ukraine, when Russia invaded its neighbour in February, the company's whole supply chain was turned upside down. 

RFA's co-founder Jörn Spurmann describes how the disruption is taking its toll.  

"Our suppliers, they have difficulties to get certain things. We see logistics prices increasing for the shortage of containers, hopefully a temporary problem. We see energy prices increasing obviously as well. Hopefully also a temporary effect. But yeah, there are certain things that do affect business,,,but more our supply chain than us."

Spurmann and RFA are due to launch the company's first rocket into space in 2023. If they are to keep to that schedule they will need to get creative. The company is now adapting parts and components produced for other industries, to use in their rockets, as these are easier to get hold of.

"There are suppliers who are coming back with higher pricing or longer lead times...And then we need to find alternatives. There are always alternatives. We don't have any single sources, but this requires more time and more effort definitely on the supply chain management on our side," explains Spurmann. 

The aerospace industry is not the only sector affected by this supply chain disruption. After two years of pandemic, the long-awaited economic recovery is now in the balance, especially with people in Europe feeling the pinch due to the rising cost of living.

The European Commission has forecast an inflation rate of 6.5 percent for Germany this year - a record high since the country’s reunification in 1990.

Joachim Schallmayer, head of capital markets and strategy at Dekabank says those price pressures are hitting consumer confidence. 

"Households are losing power in consumption. So they will have to scale back. For the companies, it's a relative loss of competitiveness, especially for the companies who are located in Germany. We have to bear the burden of these higher energy prices and they can pass it on to a certain extent, but not all of it."

As growth stalls and prices rise, the EU hopes that its 800 billion euro pandemic recovery plan will help contain the situation.

But economic clouds of uncertainty are likely to remain in the weeks and months ahead as the war continues to rage in Ukraine.

 

Economic growth and inflation forecast 

in EU27 and eurozone

 

The 2022 outlook is for lower growth and higher inflation.

GDP (Gross Domestic Product) growth in both the EU as a whole and the euro area is now expected to be 2.7%Inflation is now expected to average at an all-time high of 6.8% in the EU, and in the euro area, it is projected to reach 6.1%.


:

Poste similare


Photos de l'article

Video de l'article