Conflict in Ukraine worsens European outlook

The Euro area is expected to see slow growth in the EA in the near term, as economic activity is affected by Russia’s invasion of Ukraine, especially through weaker confidence and higher inflation.

DBRS Morningstar said in a macroeconomic update that consumer confidence fell in March to its lowest level since May 2020, likely reflecting concerns over the impact of energy price increases on household finances.

The rating agency added that the conflict is also adding to existing supply shortages and disrupting trade further, through bans on exports and imports and financial sanctions.

“The conflict in Ukraine is affecting European economies by weakening sentiment, increasing inflation and worsening existing bottlenecks. An intensification of the conflict and higher inflation now pose the main downside risks to the economic outlook in Europe in the near term”, noted Adriana Alvarado, Senior Vice President in DBRS Morningstar’s Global Sovereign Ratings Group.

Price pressures, to a large extent emanating from high energy prices and supply shortages, have intensified and are expected to last for longer than previously anticipated. This is especially the case as Europe tries to wean off Russian gas and the conflict in Ukraine continues.

“Downside risks to the EA economic outlook could materialise from rising geopolitical risks, including disruptions in gas supplies from Russia, and renewed pandemic-related restrictions.

“In DBRS Morningstar’s view, further deterioration in confidence and additional inflationary pressures, especially if combined with prolonged gas disruptions or an oil embargo, could lead to a downturn by weighing on consumption, which has supported the demand-driven recovery so far.”