June 9, 2022
For May 2022, the European Central Bank (ECB) reported that the global economy continued to be affected by the Russia-Ukraine war. The effects of the invasion caused some repricing in global financial markets and further depleted the confidence of businesses and consumers despite the lifting of the tight restrictions, which were imposed during the coronavirus (COVID-19) pandemic. ECB pointed out that the main threat to euro area financial stability stemmed from the impact through macroeconomic channels, which indicates additional challenges for indebted businesses at a time when countries’ fiscal space is very limited, and support may need to be more targeted than the broad fiscal policy response to the pandemic.
Since the latter part of 2021, it was expected that the economic recovery in 2022 would be slowed based on rising inflationary pressures. Following the Russian invasion in Ukraine, the upside risks to inflation in the euro area rose sharply along with the downside risks to growth. With the large rises in commodity and energy prices (seen in the chart below) and ongoing global supply chain pressures, the period of elevated inflation is expected to be prolonged. While peace could yield a reversal of some pressure, ECB warns that a prolonged conflict could result in sustained higher inflation and even lower growth outturns than projected currently.
Additionally, risks to inflation, growth and global financial conditions could also be sparked by other global events, such as a broader resurgence of the coronavirus (COVID-19), emerging market weakness or a sharper economic slowdown in China.
Furthermore, the consequences of the war and the shift to a lower-growth, higher-inflation environment affect virtually every facet of economic activity and financing conditions, which in turn might not only amplify, but could also cause the materialisation of pre-existing financial stability vulnerabilities such as heightened debt sustainability concerns in non-financial sectors or the possibility of corrections in both financial and tangible asset markets.
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