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Russia’s war in Ukraine is delivering a “supply shock” to the eurozone economy that will push prices up, reduce growth and diminish consumer and business confidence, said Christine Lagarde, president of the European Central Bank.
Presenting her most bleak assessment yet of how the invasion will affect the bloc’s economy, Lagarde said Europe “entered a difficult phase” as she outlined how the rising price of energy, food and manufactured goods is affecting consumers’ purchasing power. would press. The conflict began to “take away confidence,” she added.
“It is clear that the longer the war lasts, the higher the economic costs will be and the more likely we are to end up in more adverse scenarios,” she said, specifying that higher energy prices would already cut the eurozone’s revenues by 1.2 percent in the fourth quarter of 2021. “That figure would mean a loss of about 150 billion euros in one year,” she added during a speech in Cyprus.
Her comments came as the German government took the first formal step towards gas rationing on Wednesday as it prepared for a possible halt in supplies from Russia over a dispute over payments, which is turning Europe’s industrial heart into a crisis. crisis could collapse.
The group of economists advising the German government warned of a “significant” risk of a recession if Russian energy imports were halted, which could push inflation in Europe’s largest economy by as much as 9 percent.
The council of economic advisers also lowered its 2022 growth forecast for Germany from 4.6 percent to 1.8 percent and raised its inflation forecast from 2.6 percent to 6.1 percent.
An EU survey published on Wednesday showed that European consumers and businesses have become much more pessimistic since last month’s Russian invasion, fearing it would cut spending, raise unemployment and raise prices more quickly.
Meanwhile, Spanish inflation rose to 9.8 percent in March, the highest level since 1985, from 7.6 percent last month and well above expectations, the country’s statistics agency said Wednesday.
Early regional figures indicated German inflation would rise above 7 percent in March, which would be the highest level since the early 1980s. Economists also expect euro-zone price growth to hit a new all-time high of 6.6 percent in March, when those figures are released Friday.
Investors are betting that the ECB will raise interest rates several times and reset it to zero by the end of the year. They increased those bets on Wednesday, pushing German 10-year bond yields to 0.68 percent.
The ECB responded to rising inflation this month by outlining plans to halt net bond purchases by September, paving the way for a rate hike this year if inflation remains high. Lagarde said on Wednesday: “The best way monetary policy can navigate this uncertainty is to emphasize the principles of optionality, gradualism and flexibility.”
But the ECB president also signaled that EU governments could do more to support the economy: “Europe needs a plan to ensure that the necessary investments come online as quickly and smoothly as possible, involving public and private financing reinforce each.”
The European Commission said the economic sentiment indicator fell 5.4 points this month to minus 108.5, its lowest level in 12 months, “mainly due to plummeting consumer confidence”.
Confidence among companies in manufacturing and retail declined, but remained stable in services, the committee said. Inflationary pressures mounted as corporate selling price expectations rose to record highs.
The labor market outlook also deteriorated, as consumer unemployment expectations rose sharply and employment expectations declined in most sectors except services.