Cracks widen in eurozone as war in Ukraine rages on; Canadian dollar climbs to 5-month high — Macro Snapshot

RIYADH: Europe’s economy is increasingly strained by Russia’s war in Ukraine as growth stalls, confidence plummets and inflation soars, data and warnings from policymakers made clear on Wednesday.

Sanctions on Russia following its invasion last month have pushed energy prices to record highs across the continent, sapping confidence and raising the risk of another recession, even before some states have recovered from a COVID-fueled downturn.

Germany, the bloc’s biggest economy and one of the most reliant on Russian energy, will be among the hardest hit and the government’s council of economic advisers on Wednesday more than halved their growth forecast for this year, to 1.8 percent.

“The risk of a recession is substantial,” Volker Wieland, one of the panel’s members said, adding the economy would now take until the third quarter to return to its pre-pandemic size.

The advisers, whose forecasts guide the government in setting fiscal policy, also predicted that German inflation would double to over 6 percent.

European Central Bank President Christine Lagarde also warned that, as the conflict drags on, Europe’s economy could suffer more than feared just a few weeks ago.

In Vienna, Austria’s central bank cut its growth forecast and sharply raised its inflation outlook for this year, saying its new predictions would worsen further if the war dragged on. 

Stagflation dilemma 

Lagarde said households were already becoming more pessimistic and businesses could soon be postponing investment.

Her warning was underlined by a sentiment indicator that showed the war had sent consumer confidence in the eurozone plummeting and inflation expectations to record highs. 

The European Commission’s economic sentiment index dropped to 108.5 in March from a downwardly revised 113.9 in February, while consumer confidence plunged to -18.7 from -8.8.

The biggest hit to confidence came from inflation, which is sapping consumer spending power, even as governments quickly roll out subsidies to ease some of the pain.

In Spain, one of the bloc’s biggest economies, inflation accelerated to 9.8 percent in March, the fastest pace since May 1985, from 7.6 percent in February. 

German price growth, meanwhile, soared past expectations to hit 7.6 percent, a level not seen since the early 1980s, suggesting that the eurozone reading on Friday is almost certain to exceed economists’ 6.6 percent forecast.

“Those inflation numbers were absolute whoppers, big big upside surprise to the numbers,” Chris Scicluna, head of research at Daiwa Capital Markets, said.

Mexico inflation

Mexican central bank board member Gerardo Esquivel said headline and core inflation rates in Mexico are still very high, according to comments he made in a podcast published by Mexican bank Banorte on Wednesday.

Inflationary pressures that had started mounting with the COVID-19 pandemic increased after Russia invaded Ukraine a month ago, Esquivel said.

Chile’s revises growth forecast 

Chile’s central bank revised its forecast for 2022 economic growth on Wednesday, dropping it to a range of 1 percent to 2 percent from an estimate of 1.5 percent to 2.5 percent in December.

“The economy will expand at rates below its potential in 2022 and 2023, with contractions in private consumption and investment,” the central bank said in a statement.

It also predicated that annual inflation would reach 8.2 percent this year, above the central bank’s tolerance range and up from a previous estimate of 4.5 percent.

The central bank said the rise in consumer prices was a response to the “excessive increase in spending” in recent quarters, which was supported by COVID-19 stimulus programs.

On Tuesday, the central bank raised its benchmark interest rate by 150 basis points to 7 percent, as it rapidly withdraws the monetary stimulus that followed the start of the pandemic in March 2020.

US economic growth 

The US economy grew robustly in the fourth quarter, the government confirmed on Wednesday, but momentum has slowed significantly amid a surge in COVID-19 infections at the start of the year, snarled supply chains and soaring inflation.

Gross domestic product increased at a 6.9 percent annualized rate, the Commerce Department said in its third estimate of fourth-quarter GDP growth. That was revised slightly down from the 7.0 percent pace estimated in February.

The economy grew at a 2.3 percent rate in the third quarter. Growth is 3.1 percent above its pre-pandemic level. Economists polled by Reuters had expected GDP growth would be revised up to a 7.1 percent rate. The revision to the fourth-quarter GDP reading reflected downgrades to consumer spending and export growth.

For all of 2021, the economy grew 5.7 percent, the strongest since 1984, after the government provided nearly $6 trillion in pandemic relief. It contracted 3.4 percent in 2020, the biggest drop in 74 years.

Fed Reserve

The Federal Reserve this month raised its policy interest rate by 25 basis points, the first hike in more than three years and signaled an aggressive stance that has left the bond market fearing a recession down the road. The widely tracked US 2-year/10-year Treasury briefly inverted on Tuesday for the first time since September 2019.

Corporate profits growth slowed significantly in the fourth quarter as domestic financial corporations suffered a decrease. There were also moderate increases in profits of domestic non-financial corporations and from the rest of the world.

Corporate profits with inventory valuation and capital consumption adjustments increased at a $20.4 billion rate in the fourth quarter after rising at a $96.9 billion pace in the third quarter.

Canadian dollar jumps 

The Canadian dollar strengthened to its highest level in nearly five months against its US counterpart on Wednesday as oil prices rose and investors assessed prospects of Russia reducing military operations in parts of Ukraine.

 The safe-haven US dollar  fell to its lowest in almost two weeks and the euro gained, with currency traders optimistic about peace talks in Ukraine, even amid warnings about the damage to Europe’s economy. 

Dollars purchases in Lebanon 

Lebanon’s central bank on Wednesday extended a circular allowing banks to purchase an unlimited amount of US dollars on its Sayrafa exchange platform until the end of April, a central bank statement said.