Home News The European economy grew by just 0.2%, while inflation hit a new...

The European economy grew by just 0.2%, while inflation hit a new 7.5%


Eurozone economic growth in the first quarter was weaker than expected, as the economic weakness shown by France and Italy canceled out the advance given by some resilience of Germany and Spain, as the conflict in Ukraine significantly impacts European economies.

In Romania, the National Strategy and Forecast Commission (CNSP) has reduced its GDP growth forecast from 4.3% to 2.9% in 2022 and from 5.1% to 4.4% in 2023. The estimated consumption of the population has also been revised and is down from 3.1% to 3.8% in February, which was before the start of the military conflict in Ukraine. The reasons for the decline are: the slowdown in European and world economic activity, which also leads to a slowdown in the Romanian economy, the conflict between Russia and Ukraine, which has led to a worsening of trade indicators in the context of high dependence on Russian gas and a new wave pandemic in China, which will exacerbate supply chain blockages and affect the auto industry. The positive factors are related to the mitigation of the Covid pandemic and the recovery of the transport industry and the Horeca sector.

Individual investors are also rather pessimistic. According to the eToro Retail Investor Beat survey, 51% of Romanian investors expect a worsening of the local economy this year. This is an increase of 8% compared to the result at the end of 2021. Only 23% believe that the situation will improve. 49% of the Romanian investors interviewed expect the global economy to worsen as well.

April inflation in the EU rose to 7.5% from 7.4% previously. The champions are the Baltic States, Estonia with 19%, Lithuania 16.6% and Latvia 13.2% but also the Netherlands with 11.2%. The European Central Bank (ECB) will try to find a balanced solution at its next meeting on June 9, supporting the economy but also preparing some necessary interest rate hikes, with investors now expecting three hikes this year.

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Inflation has been driven by a sharp rise in energy and food prices, which has become more widespread and more pronounced. And the prices of the raw materials that feed it will remain high, warns the latest report of the World Bank. “The war in Ukraine has caused a major shock to commodity markets, changing global patterns of trade, production and consumption in ways that will keep prices at historically high levels by the end of 2024.” Energy prices are expected to rise by more than 50% in 2022, before easing in 2023 and 2024. At the same time, prices for non-energy products, including those in agriculture and metals, are expected to rise by almost 20% in 2022 and will also temper in the coming years.

According to the report, as price increases have been widespread for all fuels, there are fewer options now to replace the most affected energy products. Rising prices for some commodities also drive up prices for other commodities. High gas prices have increased fertilizer prices, putting increasing pressure on agricultural prices. The World Bank believes that policy responses so far have focused more on tax cuts and subsidies, which can often exacerbate supply shortages and price pressures, rather than focusing on long-term measures to reduce demand and encourage alternative sources of supply.

The Russian-Ukrainian conflict and its associated sanctions also lead to the adoption of more expensive trade patterns that could lead to long-term inflation. It is expected to cause a major diversion of energy trade routes. For example, some countries are now looking to supply coal from more distant places. At the same time, some of the major coal importers could increase imports from Russia, while reducing demand from other large exporters. This diversion will probably be more expensive, the report notes, because it involves longer distances and coal is bulky and expensive to transport. Similar diversions of transport and supply occur in the case of natural gas and oil.

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The US economy is also experiencing the effects of high commodity prices and supply chain problems, with the latest figures showing an annualized decline in GDP of 1.4% in the first quarter of 2022. Declines in government spending, inventory record trade imbalances impacted growth. Although this decline triggered some concerns about the recession, the report showed a strong increase in consumption of 2.7% after inflation, the largest increase in the last three quarters. Analysts believe that this sharp drop in GDP is unlikely to stop the Fed from raising interest rates again in May.

Despite these forecasts, only 19% of Romanian investors who responded to the eToro Retail Investor Beat survey see rising interest rates as a threat to their investments. The vast majority fear that inflation, international conflicts and the state of the global economy will negatively affect their investment portfolios this quarter.

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