IMF warns Russia-Ukraine war will have ‘severe economic consequences’ for Europe – as it happened | Business

 IMF warns Russia-Ukraine war will have ‘severe economic consequences’ for Europe – as it happened | Business


IMF slashes European growth forecasts

The International Monetary Fund warns of “severe economic consequences for Europe” from the Russia-Ukraine war, and has slashed its economic growth estimates.

The Russian invasion of Ukraine created a “humanitarian catastrophe,” the Washington-based institution said in a report on Europe. In the two months since the outbreak, about 5 million people (mostly women and children) have fled Ukraine, and a further 7 million are estimated to be displaced internally, while thousands have been killed or wounded.

The IMF is now forecasting growth of 3% for advanced European economies this year, down from 4% in January, and 3.2% growth in emerging European economies (excluding Belarus, Russia, Turkey, and Ukraine), down from 4.7% in January. Output losses will be far larger in Russia and, especially, in Ukraine – Russia is forecast to shrink by 8.5% while war-ravaged Ukraine is set to decline by 35% in 2022 and will feel the impact for years to come.

Earlier this week, the IMF downgraded its global growth forecast from 4.4% to 3.6% and also cut estimates for individual countries.

It said today:

The war will have severe economic consequences for Europe, having struck when the recovery from the pandemic was still incomplete. Before the war, while advanced and emerging European economies had regained a large part of the 2020 GDP losses, private consumption and investment still remained far below pre-pandemic trends.

The war has led to large increases in commodity prices and compounded supply-side disruptions, which will further fuel inflation and cut into households’ incomes and firms’ profits.

New risks have emerged from the war. A protracted war would increase the number of refugees fleeing to Europe, compound supply-chain bottlenecks, add pressures to inflation, and deepen output losses. The most concerning risk is a sudden stop of energy flows from Russia, which would lead to significant output losses, for many economies in central and eastern Europe in particular.

Closing summary

European stock markets are sliding, as investors digest the prospects of more aggressive rate hikes in the US and Europe, following comments from US Fed chair Jerome Powell and European Central Bank officials yesterday. Eurozone growth unexpectedly picked up in April while prices rose at a record rate, according to business surveys from S&P Global published today.

In London, the FTSE 100 index is down nearly 0.9% at 7,560, a 67 point loss, while the German, French and Italian markets have lost between 1.7% (Italy) and 1.9% (German). On Wall Street, the Dow Jones fell 350 points, or 1%, at the open, while the Nasdaq slipped 0.16% and the S&P 500 fell 0.75%.

The pound has tumbled to an 18-month low of 1.14% to $1.2878 against the dollar, and is down 1.06% to €1.1891 versus the euro. A sharp drop in British retail sales showed the impact of the cost of living crisis, driven by surging fuel and food prices.

Coupled with weaker PMI data for April and a slump in UK consumer confidence, the figures have led to expectations that the Bank of England will raise interest rates less aggressively.

Oil prices have fallen again, amid expectations of lower demand as the IMF slashed growth forecasts this week. Brent crude is down 1.4% to $106.73 a barrel while US light crude fell 1.7% to $102.08 a barrel.

The European Commission has urged citizens to drive less, turn their heating and air conditioning down and work from home three days a week, to reduce reliance on Russian oil and gas – and save households close to €500 on average.

Our other main stories today:

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Chris Williamson, chief business economist at S&P Global said:

Although still indicative of annualised GDP growth of approximately 3%, the April PMI surveys point to the upturn losing some momentum compared to the strong rebound seen in March, when services activity in particular had been buoyed by loosened pandemic restrictions in the US and abroad.

Many businesses continue to report a tailwind of pent up demand from the pandemic, but companies are also facing mounting challenges from rising inflation and the cost of living squeeze, as well as persistent supply chain delays and labor constraints.

These headwinds, plus increased concerns over the economic outlook and tightening monetary policy, meant business confidence about the outlook slipped sharply lower in April. However, with the overall pace of economic growth and hiring remaining relatively solid, for now the focus from a policy perspective is likely to remain firmly on the need to rein in the record high inflationary pressures signalled by the survey.

US business activity eases in April amid record inflation

The American economic recovery eased this month amid record inflationary pressures, according to the flash PMI data from S&P Global.

Although still faster than January’s Omicron-induced slowdown, overall growth was dampened by a softer rise in service sector output following pressure on customer spending as prices continued to increase markedly.

Manufacturers, on the other hand, indicated a stronger expansion in production on the back of rising demand. The headline flash US PMI Composite Output Index fell to 55.1 in April, from 57.7 in March. While service providers recorded a softer upturn in activity, manufacturing firms noted the quickest rise in production since last July.

Key findings:

  • Flash US PMI Composite Output Index at 55.1 (Mar: 57.7). 3-month low.
  • Flash US Services Business Activity Index at 54.7 (Mar: 58.0). 3-month low.
  • Flash US Manufacturing Output Index at 57.4 (Mar: 56.1). 9-month high.
  • Flash US Manufacturing PMI at 59.7 (Mar: 58.8). 7-month high.

The IMF press conference has finished.

All major European economies except Spain are forecast to show around zero growth in the middle of this year, with some falling into recession – defined as two consecutive quarters of economic decline. Germany, France and the UK are are at particular risk of recession, said the IMF’s Kammer.

During a press conference in Washington, Alfred Kammer, director of the IMF’s European department, said its recommendation to the European Central Bank is to “stay on the path of normalisation” of interest rates, i.e. raise rates to fight high inflation, fuelled by soaring energy costs.

He warned against a potential wage price spiral, but also said policymakers need to be guided by the economic data, and should go slower on rate hikes if necessary.

It noted that:

Germany and many EU countries have effectively begun to wean their economies off Russian energy sources. This means that some 60–70% of current Russian oil and natural gas demand may disappear within the next few years, which will require Russia to diversify its exports to other regions.

Turning to post-war reconstruction in Ukraine, the IMF said:

Post-war Ukraine will face large reconstruction needs. Social and economic infrastructure destroyed by the war will need to be rebuilt, a task that will require wide-reaching financing with a significant grant element. Reconstruction and policy support for resettlement will help refugees return and economic growth resume. The implementation of reforms to strengthen institutions and public policy will maximize the growth dividend of reconstruction

The IMF’s report said the war will set back the European recovery and further fuel inflation.

Some of the largest European economies, like France, Germany, and Italy, are projecting very weak or negative quarterly growth in mid-2022.

While higher prices of energy and food will affect vulnerable households everywhere, high natural gas prices in Europe will disproportionately affect countries with higher dependence on Russian imports (the Czech Republic, Germany, Hungary, Italy, and the Slovak Republic), given regional fragmentation in the natural gas market.

High metal prices will depress growth in countries with sectors that are strongly integrated into global value chains, like the automobile industry (the Czech Republic and the Slovak Republic). Non-energy trade disruptions will weigh on countries with stronger linkages with Russia and Ukraine, including the Baltic states, Belarus, Moldova, and Turkey. For most other European countries, non-energy trade links with Russia and Ukraine are limited but they will see declining demand from their affected European partners.

IMF slashes European growth forecasts

The International Monetary Fund warns of “severe economic consequences for Europe” from the Russia-Ukraine war, and has slashed its economic growth estimates.

The Russian invasion of Ukraine created a “humanitarian catastrophe,” the Washington-based institution said in a report on Europe. In the two months since the outbreak, about 5 million people (mostly women and children) have fled Ukraine, and a further 7 million are estimated to be displaced internally, while thousands have been killed or wounded.

The IMF is now forecasting growth of 3% for advanced European economies this year, down from 4% in January, and 3.2% growth in emerging European economies (excluding Belarus, Russia, Turkey, and Ukraine), down from 4.7% in January. Output losses will be far larger in Russia and, especially, in Ukraine – Russia is forecast to shrink by 8.5% while war-ravaged Ukraine is set to decline by 35% in 2022 and will feel the impact for years to come.

Earlier this week, the IMF downgraded its global growth forecast from 4.4% to 3.6% and also cut estimates for individual countries.

It said today:

The war will have severe economic consequences for Europe, having struck when the recovery from the pandemic was still incomplete. Before the war, while advanced and emerging European economies had regained a large part of the 2020 GDP losses, private consumption and investment still remained far below pre-pandemic trends.

The war has led to large increases in commodity prices and compounded supply-side disruptions, which will further fuel inflation and cut into households’ incomes and firms’ profits.

New risks have emerged from the war. A protracted war would increase the number of refugees fleeing to Europe, compound supply-chain bottlenecks, add pressures to inflation, and deepen output losses. The most concerning risk is a sudden stop of energy flows from Russia, which would lead to significant output losses, for many economies in central and eastern Europe in particular.

UK company insolvencies jump to five-year high

Some 2,114 UK businesses became insolvent in March, more than double the figure in March 2021 (999), and 34% higher than the pre-pandemic figure of 1,582 in March 2019.

Official figures from the Insolvency Service also show that the first quarter of this year has seen the highest number of company insolvencies – 5,197 – since the third quarter of 2017.

Mazars, the UK audit, tax and advisory firm, said rises in interest rates have made businesses’ debts more expensive to service and this is likely to have pushed some heavily indebted businesses into the red.

Businesses have also had to deal with spiralling inflation, especially soaring energy costs. These costs, combined with HMRC’s move to recover outstanding arrears from companies that failed to agree a Time to Pay arrangement, mean that companies are being left with few options.

Rebecca Dacre, partner at Mazars, said:

Businesses that were just hanging on before the recent interest rate rises have seen the rise in borrowing costs push them over the edge.

Between interest rates and inflation, this is the most difficult period for businesses since the height of the pandemic. This time they are having to manage without government support.

UK businesses will be hit by the ‘cost of living crisis’, just as consumers will be.

The moratorium on winding up petitions ended on 31 March. This prevented creditors from applying to make a business insolvent because of unpaid debts during the pandemic period.

Dacre added:

With no more government protection from their creditors, even more businesses can be expected to fail.

Bundesbank warns Russian gas embargo would lead to deep recession

It’s not just the UK that is struggling.

The German economy showed some signs of slowing because of a downturn across manufacturing in April, while its service sector held up better, according to the latest PMI data.

The Bundesbank, the German central bank, has warned that an immediate EU ban on Russian gas imports would cost Germany €180bn in lost output this year.

It said in its latest monthly bulletin that an EU embargo on Russian gas (which is still being debated) would reduce GDP by 5% this year, triggering a further surge in energy prices and a deep recession.

This is far more gloomy than what academic economists estimate. Last month, a group of nine university economists said the fallout of a full energy embargo was “manageable,” calculating that it would reduce Germany’s GDP by 0.3% to 3%.

Industry executives have been more outspoken, as might be expected. Martin Brudermüller, chief executive of the chemical group BASF, has warned that a sudden stop of Russian gas supplies could “destroy our entire economy” and trigger the worst crisis since the end of the Second World War.

Pound tumbles 1.1% to 18-month low

The pound has tumbled more than 1% to its weakest level since late 2020, after the sharp drop in British retail sales showed the impact of the cost of living crisis, driven by surging fuel and food prices.

Coupled with weaker business survey data from S&P Global and a slump in consumer confidence charted by Gfk, the figures have led to expectations that the Bank of England will raise interest rates less aggressively.

Meanwhile, US Fed chair Jerome Powell has all but sealed a 50 basis point rate hike in May, saying that it is “absolutely essential” to tame inflation. And money markets are pricing in more aggressive rate rises from the European Central Bank, after hawkish comments from central bank officials on Thursday, and better-than-expected PMI data for the eurozone today.

Sterling is trading 1.1% lower against the dollar at $1.2887, and 0.77% lower against the euro at €1.1925.

Nick Cawley, strategist a Daily FX, tweeted:

UK consumer confidence crisis: the first sign of trouble, said Kallum Pickering, senior economist at Berenberg Bank.

Confidence surveys, which are published well ahead of official economic statistics, often provide the first indication when something shifts in the underlying economy. For this reason, we should not ignore the recent batch of consumer confidence data for the UK. Across a range of measures for current sentiment and expectations, the data in April are close to or exceed their survey lows.

As our chart shows, the signal that the current level of confidence is sending is not ambiguous: real consumption is probably declining at present as the UK gets battered by rising inflation and global supply challenges, which have been amplified by Putin’s war and lockdowns in China. The key question is whether the shock will persist for long enough to cause a recession. With an unusually uncertain near-term outlook, this is not easy to answer. At a minimum, the data suggest investors should be prepared for a bad outcome.

Plunges in consumer confidence often signal a slowdown
Plunges in consumer confidence often signal a slowdown Photograph: Berenberg Bank

He added:

The Bank of England is in a serious bind: After reacting late to surging prices, the BoE (along with the US Federal Reserve) is now chasing rising inflation with a succession of interest rate hikes. The fourth such hike looks likely at the upcoming 5 May meeting – when policymakers will lift the bank rate by a further 25bp to 1.0%. While the BoE has little choice but to react to the inflation surge, it is clearly running the risk of a policy error by continuing to tighten as the recession risk rises.

If consumers demand fewer products amid the confidence plunge, that will dampen prices and lower the risk of persistent excess inflation. If workers fear recession, they may just be happy to keep their jobs and not push any erstwhile advantage in wage negotiations. Inflation will be higher than expected in the near term due to Putin’s war, but the surge may be followed by a period of disinflation at rates below 2% for a while thereafter.

In a worst-case scenario, the BoE may be unwittingly tightening into a recession that is already underway, as well as reacting to an inflation problem that may go away mostly on its own.





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