The conflict in the Middle East affects the European economy
FILE PHOTO: EU flags fly in front of the headquarters of the European Central Bank (ECB) in Frankfurt, Germany, on July 18, 2024. (Photo/Agencies)
Despite a two-week ceasefire in the conflict in Iran, much damage has already been done to the European economy, with S&P Global reporting hit growth across the eurozone and a European Central Bank policymaker saying interest rates may need to be raised.
Dimitar Radev, a member of the ECB’s governing council, said the bank will have to raise interest rates quickly if there are signs of persistent price pressures.
He told Reuters that rising energy costs caused by the conflict have already pushed inflation beyond the bank’s 2 percent target and triggered discussions about rate hikes.
“The balance of risks has tilted in an unfavorable direction,” he said.
Radev, who is also head of Bulgaria’s central bank, said that “the probability of a more adverse scenario (for the economy) has increased, particularly in light of the energy shock and the high level of uncertainty.”
The ECB is concerned that businesses and consumers may become accustomed to high energy prices and adapt them to their expectations, which will subsequently lead to businesses charging more for products and consumers demanding higher wages, he said. That could trigger an inflationary spiral that would be costly to control, he added.
The warning came as the latest figures from the S&P Global Composite Purchasing Managers’ Index show that eurozone private sector expansion weakened markedly in March, due to the impact of the Iran conflict on energy prices and disruption to supply chains and demand.
The first drop in the index in eight months put the eurozone PMI at 50.7 in March, after having been at 51.9 in February. PMI readings above 50 indicate growth.
“The March PMI indicates that the eurozone economy has already been hit hard by the war in the Middle East,” said Chris Williamson, chief business economist at S&P Global Market Intelligence.
The figures show that new orders fell in March due to a lack of demand and that export orders overall fell. Additionally, employment levels fell and business confidence fell.
Among eurozone countries, Spain had the strongest growth. France and Italy contracted. And Germany’s expansion slowed.
Headline inflation in the eurozone now stands at 2.5 percent, down from 1.9 percent previously.
