Ukraine war stokes inflation, reduces growth

The war in Ukraine has prompted us to revise our forecasts for euro-zone GDP, inflation and monetary policy. Russia’s downturn in 2015 had no obvious impact on euro-zone GDP and Russia has become less important as an export market since then. But we expect a much deeper recession in Russia this year, and the spillovers to Europe will be larger due to the severity of the sanctions. For now, we are cutting our euro-zone GDP growth forecast for this year from 3.5% to 2.8%. Meanwhile, the recent surge in commodity prices, together with upside surprises to inflation in January and February, mean that we now think headline inflation will average around 5.5% this year and 2.5% next year, well above the ECB’s 2% target. Finally, the war seems to have made policymakers at the central bank more cautious, so we think they will wait a little longer before tightening policy than previously seemed likely. We now anticipate one 25bp rate increase late this year and another 50bp during 2023. Drop-In (8 March, 10:00 EST/15:00 GMT): We’re discussing Russian energy imports and Europe’s energy needs in this special 20-minute briefing on one of the big sticking points in the western response to the war in Ukraine. Register here.