Stagflation risks grow: ECB lowers growth and raises inflation forecasts as Russia wages war on Ukraine
(Kitco News) - Gold prices are holding above $2,000 an ounce, but the price action remains volatile as the European Central Bank acknowledged the growing risk of stagflation as it significantly lowers its growth forecasts and increases its inflation outlook.
Christine Lagarde, President of the ECB, said that Russia's war with Ukraine is having a material impact on Europe's economy as energy and commodity prices continue to rise.
"The risks to the economic outlook have increased substantially with the Russian invasion of Ukraine and are tilted to the downside. While risks relating to the pandemic have declined, the war in Ukraine may have a stronger effect on economic sentiment and could worsen supply-side constraints again. Persistently high energy costs, together with a loss of confidence, could drag down demand more than expected and constrain consumption and investment," said Lagarde in her opening remarks.
In its latest economic projections, the ECB said that Gross Domestic Product is expected to expand 3.7% in 2022, down from the previous forecast of 4.2% growth. Economic activity is expected to increase 2.8% next year, down from the prior forecast of 2.9%. The economy is expected to grow 1.6% in 2024, unchanged from the previous forecast.
"The prospects for the economy will depend on the course of the Russia-Ukraine war and on the impact of economic and financial sanctions and other measures. At the same time, other headwinds to growth are now waning," Lagarde said.
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Looking at consumer prices, the ECB sees inflation rising 5.1% this year, up significantly from the previous forecast of 3.2%. Next year, inflation is expected to rise 2.1%, up from December's projection of 1.8%. Consumer prices are expected to rise 1.9% in 2024, up from the previous estimate of 1.8%.
Lagarde noted that inflation is currently being driven by rising energy prices, which jumped 3.17% in February. Due to seasonal factors and rising fertilizer prices, she added that food prices are also increasing.
Although inflation is expected to remain elevated, Lagarde said she doesn't see a paradigm shift in consumer prices. She added that the ECB doesn't see a wage spiral that would lead to long-term inflation.
"Price rises have become more widespread. Most measures of underlying inflation have risen over recent months to levels above two%. However, it is uncertain how persistent the rise in these indicators will be, given the role of temporary pandemic-related factors and the indirect effects of higher energy prices," she said.
Some economists have noted that the ECB is prioritizing rising inflation over economic growth as it looks to end its monthly bond purchases by the third quarter, highlighted in the ECB monetary policy statement.
Lagarde said that the move to end its quantitative easing measure will be data-dependent and if inflation rises in line with expectations. However, she pushed back on the idea that the action is seen as tightening.
"We are not talking about tightening," she said. "We are talking about normalizing. We acknowledge the fact that in the present environment, which is that of high inflation… the support that net asset purchases can give to policy rates is getting close to conclusion."
Gold prices are not seeing a significant reaction to the ECB's latest inflation projections; however, prices remain above $2,000 an ounce, up more than 1% on the day.
Gold priced in euro terms also shows steady momentum, holding near session highs. Gold in euro terms last traded at €1,821.76 an ounce, up more than 1% on the day.