EU warns economic consequences of Ukraine war ‘turning grimmer’ as it hikes inflation forecast – business live

It’s official: the European Commission has cut its growth forecasts for the euro area, and hiked its inflation outlook.

In its summer forecasts, just released, the EC warns that economic shocks are hitting the European economy.

The Ukraine war is the major factor, along with soaring inflation, China’s latest lockdowns and the slowdown in America (US GDP shrank in Q1), it says.

The EC warns:

As the reality of a protracted Russian invasion of Ukraine sinks in, the assessment of its economic consequences for the global economy is turning grimmer. The shocks unleashed by the war are hitting the EU economy both directly and indirectly, setting it on a path of lower growth and higher inflation.

The rapid increase in energy and food commodity prices is feeding global inflationary pressures, eroding the purchasing power of households and triggering a faster monetary policy response than previously assumed. Furthermore, the deceleration of growth in the US is adding to the negative economic impact of China’s strict zero-COVID policy.

The EU executive now predicts growth of 2.6% this year for the 19-country currency bloc, slightly less than the 2.7% it had forecast in May.

The picture for 2023 is gloomier; growth is now forecast to slow to just 1.4%, instead of the 2.3% previously estimated, as higher energy prices take their toll.

Inflation in the euro area is projected to peak at a new record high of 8.4% in the third quarter of 2022, prompting the EC to hike its inflation forecasts for this year.

It now expects eurozone inflation will average 7.6% in 2022, up from 6.1% forecast in May, amd by 4% in 2023 (as the draft predictions we covered earlier suggested).

Inflation in the wider EU is seen even higher, at 8.3% this year.

And the EC warns that confidence is weakening, due to soaring prices of energy, food, and other goods and services:

Whereas prices of some commodities are retreating from recent peaks, the EU economy remains vulnerable to developments in energy markets due to its high reliance on Russian fossil fuels. With gas prices nearing all-time highs energy inflation is on the rise.

Food inflation is also surging, but pressures are broadening further as higher energy costs are passed-through to services and other goods. Lower income households are especially hit by the protracted rise in prices.

Whereas businesses still eye an expansion of economic activity, they are less optimistic about the future, which will weigh on investment. Households are just as negative about the future as they were at the onset of the pandemic, which is set to drag on the recovery of private consumption.

The number of UK firms planning to raise prices further has dropped, according to the latest real-time data, as demand softens.

Over a quarter of businesses surveyed by the Office for National Statistics expect to increase the cost of their goods or services in August, down from 31% estimated for April.

Energy prices remained the most commonly reported reason for considering doing so, with half of companies said they’d paid more for goods and services last month.

The ONS also found that 24% of firms said their turnover decreased in June 2022 compared with May 2022 — a sign that the cost of living squeeze is hitting the economy.

Only 13% reported that their turnover had increased, while 54% reported that their turnover stayed the same.

There was also a drop in eating out, with UK seated diner numbers falling by 3 percentage points last week.

Back in the UK, average private rents in Britain have hit record highs, jumping by more than 20% in some areas such as Manchester.

The average advertised rent outside London is 11.8% higher than a year ago, while in the capital it is up by 15.8%, according to the property website Rightmove.

Shortages of properties on the market are leading to intense competition among tenants for what is available, while some landlords are raising rates following rising interest rates.

During the period from 1 April to 30 June, the average advertised asking rent outside London hit another new record of £1,126 a calendar month, Rightmove said. This figure has jumped by 19% – or £177 – in the two years since the pandemic started.

Here’s the full story, by my colleague Rupert Jones:

Rightmove’s Tim Bannister warned that inbalances between supply and demand will keep pushing prices up:

“The story of the rental market continues to be one of high tenant demand but not enough available homes to meet that demand. Last year we saw exceptional numbers of tenants looking to move and this year we have seen no let-up in this trend.

Whilst stock levels are beginning to improve, with June seeing the highest number of new rental listings coming to market so far this year, the wide gap that has been created between supply and demand over the last two years will take time to narrow. Until then, this imbalance will continue to support asking rent growth. This has led to our revised forecast of a 8% rise in asking rents by the end of the year up from 5%.”

Italian government bonds are weakening this morning ahead of a confidence vote that could bring down Mario Draghi’s government.

Bond yields have risen sharply in early trading, following the news that Italy’s government is close to collapse, which could prompt calls for early elections.

The populist 5-Star Movement said it would boycott a crucial vote on a cost of living package to help businesses and households with rising energy prices, arguing the funds are insufficient.

After negotiations with prime minister Draghi failed to reach a breakthrough, 5-Star’s leader, Giuseppe Conte, told reporters:

“The scenario has changed, we need a different phase.

“We are ready to support the government but not to sign a blank bill. Whoever accuses us of irresponsibility needs to look in their own backyard.”

Without 5-Star’s support, it will be very hard for the government to win the vote.

Mohit Kumar of Jefferies doesn’t expect the crisis to lead to early elections, though, even if Draghi does resign.

Our base case remains that the current crisis should not result in early elections as no party, including M5S, would want to go to polls when the country is facing a cost of living and energy crisis. However, the recent M5S stance has raised risks of political instability in the short term.

Currently, M5S is fairly divided and there is a possibility that a faction of M5S still votes for the Draghi government. If Draghi resigns today, President Mattarella would ask him to check if he still has a majority and could also start discussions with other political parties to find a solution. This could result in a period of volatility for a few days.

Global recession risk rising as economic outlook ‘darkens significantly’, IMF says

Martin Farrer

The head of the IMF has warned that the outlook for the global economy has “darkened significantly” in recent months.

Kristalina Georgieva said the commodity price shock from the war in Ukraine had exacerbated the cost-of-living crisis for hundreds of millions of people, and that the risk of recession was rising.

“The outlook remains extremely uncertain. Think of how further disruption in the natural gas supply to Europe could plunge many economies into recession and trigger a global energy crisis.

This is just one of the factors that could worsen an already difficult situation.

“It is going to be a tough 2022 – and possibly an even tougher 2023, with increased risk of recession.”

The IMF would be downgrading its growth forecasts for global growth for both 2022 and 2023 later this month, she said, having warned in April that its forecast of 3.6% was likely to be revised downwards.

Here’s the full story:

Good morning, and welcome to our rolling coverage of business, the world economy and the financial markets.

Europe’s economic outlook is deteriorating, as the Russia-Ukraine war continues to drive up oil and gas prices, hinder supply chains, and threatens full-scale disruption to energy supplies.

That’s expected to be the message from the European Commission, when it releases its latest economic projections this morning.

Those summer forecasts are due at 10am UK time, but Bloomberg has already seen a draft version. It show the euro area’s rebound from the pandemic will be weaker than anticipated, and that inflation will be even higher than feared, they say.

The Commission now expects eurozone inflation to jump to 7.6% in 2022, on average, sharply higher than its May estimate of 6.1% for the year, due to the surge in energy prices.

It also expects inflation to run around 4% next year — still double the official targets — up from May’s forecast of 2.7%.

The growth outlook has weakened too as rising prices hit demand, while fears of winter energy shortages hit confidence.

Eurozone GDP is now seen rising by 2.6% this year and 1.4% in 2023, Bloomberg reports, down from May predictions for gains of 2.7% and 2.3%.

The forecasts could still change before they’re officially published. But, Valdis Dombrovskis, executive vice president at the European Commission, has already warned that there will be some downward revisions, telling reporters on Monday that:

“What we see [is that] economic growth is proving quite resilient this year, still one can expect some downwards revision and even more so for the next year because of many uncertainties and risks.

“Unfortunately, inflation continues to surprise on the upside, so it’s once again going to be revised upwards.”

Europe fears that Russia doesn’t turn the Nord Stream 1 gas pipeline back on later this month, when its current maintenance is completed. That could lead to rocketing bills, energy rationing and economic turmoil this winter.

Recession fears helped to drive the euro below parity with the US dollar yesterday, for the first time since 2002.

The euro has risen back over $1, just. European stock markets are set to open slightly higher after taking a jolt yesterday when US inflation hit a new 40-year high of 9.1%.

We also get the latest real-time data on the UK economy today, plus weekly US jobless figures and data showing how rapidly America’s factories are raising their prices.

The agenda

• 9.30am BST: Bank of England credit conditions survey
• 9.30am BST: ONS’s latest real-time indicators of economic activity and social change
• 10am BST: European Commission to publish latest economic forecasts
• 1.30pm BST: US weekly jobless figures
• 1.30pm BST: US PPI measure of producer price inflation