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London (CNN Business)Stagflation strikes fear in the hearts of economists – and policymakers – around the world. Europe could be heading for something even worse.
Western sanctions imposed after Russia’s invasion of Ukraine have sent global energy prices skyrocketing and consumer confidence in Europe plummeted. Russia is being cut off from Western financial markets.
Economists expect that the European economy will suffer. Barclays analysts have lowered their growth forecast for the euro zone for this year by 1.7 percentage points to 2.4%. Private consumption, investment and exports are likely to grow at a slower pace across the continent.
At the same time, the prices of energy and other commodities such as wheat and metals are rising rapidly. Barclays has upgraded its 2022 eurozone inflation forecast by 1.9 percentage points to 5.6%.
In other words, the war fuels stagflation, which describes a period of high inflation and weak economic growth. The best recent example is the 1970s, when an energy supply shock hit developed economies.
Stagflation is a nightmare for policymakers, who have few good ways to stem soaring prices without hurting the economy. In the United States, in the 1970s, Federal Reserve Chairman Paul Volcker was finally forced to raise interest rates to unprecedented levels in order to contain inflation.
Back to the present, Europe could now be facing something worse than stagflation: a potential recession with inflation spiraling out of control.
Barclays said that even after major downgrades to its forecasts, the economy could turn out to be worse than expected. The bank warned that the situation was highly uncertain.
What is the worst case scenario for Europe’s economy?
A complete ban on Russian energy imports would push Brent crude prices to $160 a barrel and push the eurozone into its third recession since the coronavirus pandemic began, according to Capital Economics.
“A collapse in Russia’s energy trade would accelerate electricity rationing in parts of Europe, which in turn could disrupt supply chains and fuel additional inflationary pressures around the world,” said economist Caroline Bain.
“Higher energy prices would also push up soft commodity and industrial metal prices,” she added.
Russia, which needs energy revenues to fund government spending and keep its economy afloat, has warned the West against a ban on oil imports.
“It is absolutely clear that a rejection of Russian oil would have catastrophic consequences for the world market,” Russian Deputy Prime Minister Alexander Novak said on state television, according to Reuters.
“The price increase would be unpredictable. It would be $300 a barrel if not more,” added Novak, who also served as Secretary of Energy.
US officials are already discussing an import ban. EU leaders made it clear this week that the bloc cannot yet join the United States as it would impact households and businesses.
But none of this is good news for central banks — particularly the ECB, which meets on Thursday.
“We believe the conflict will keep the ECB on hold and may even require a more accommodating stance as the ECB will do whatever is necessary (and costly) to prevent this war from becoming an economic and financial crisis will,” wrote analysts at Barclays.
That likely means no rate hikes before March 2023 and no commitment to end QE. Barclays also expects the central bank to keep all options on the table when it comes to maintaining stability.
US gas hits record $4.17 a gallon
US drivers have never paid so much for gas. According to AAA, the price of a gallon of regular gasoline is now $4.17.
That breaks the previous record of $4.11 a gallon that had stood since July 2008, reports my CNN Business colleague Chris Isidore.
As Russia continues its military offensive in Ukraine, gas prices are rising faster than at any time since Hurricane Katrina hit oil platforms and refineries along the US Gulf Coast in 2005.
The $4.17 average means the price is up 55 cents a gallon in the last week alone and 63 cents, or 18%, since February 24, the day Russian forces invaded Ukraine .
Gas price spikes aren’t going away anytime soon, said Tom Kloza, global head of energy analysis at OPIS.
“I think we’re going to hit $4.50 a gallon before it turns around,” Kloza said. “The risk is how bad it gets, how long it goes on. Even $5 a gallon statewide is possible. I would not have predicted that before the fighting started.”
Great Firewall of Russia?
Russia’s Internet has long spanned East and West.
Russian citizens, unlike their Chinese counterparts, have been able to access US technology platforms like Facebook, Twitter and Google despite being subject to censorship and restrictions – the defining feature of China’s internet model.
But Russia’s invasion of Ukraine, which has increasingly isolated the country in recent days, could also prove the death knell for its presence on the World Wide Web, my CNN Business colleague Rishi Iyengar reports.
The mood: The Russian government said on Friday it had decided to block Facebook, citing the social network’s efforts in recent days to impose restrictions on Russian-controlled media.
Though Facebook is by no means the country’s largest platform, the suspension could be a symbolic move to indicate that President Vladimir Putin’s government is prepared to go after big global names if they don’t stick to the party line. (Instagram and WhatsApp, which are more popular in Russia and also owned by Facebook parent company Meta, have not yet been banned).
Already the country’s main telecoms regulator, Rozkomnadzor, is pressuring Google for allegedly “false” information and has reportedly restricted Twitter as well. Other platforms choose to shut down operations themselves.
Being cut off from Russia may not pose an existential threat to Western tech platforms, some of which count their audiences in the billions. But these moves have major implications for Russians’ ability to access information and express themselves freely. At a more fundamental level, it could also further accelerate the fracturing of the global internet as we know it.
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