Euro zone: activity slows under the effect of the war in Ukraine

Posted 24 March, 2022

Growth in economic activity in the eurozone slowed in March in the private sector, suffering the impact of the war in Ukraine, according to the composite PMI index published Thursday by the firm S&P Global, which points to a risk of contraction in the second trimester.

The index, calculated on the basis of business surveys, fell to 54.5, after 55.5 in February. This figure above 50 means that activity continued to grow in March, although at a slower pace. A figure below this threshold would signal a decline.

"The latest survey data underscores the concrete and immediate consequences of the war in Ukraine on the economic situation in the eurozone and underlines the risks of contraction weighing on the economy of the region in the second quarter", commented Chris Williamson, chief economist of S&P Global.

Activity in the 19 countries sharing the single currency has nevertheless benefited from a very clear relaxation of health measures linked to Covid-19.

Without this easing of constraints, which have weighed heavily on companies since the start of the pandemic, the slowdown in growth in March “would have been significantly more pronounced”, underlined Mr. Williamson.

The main consequence of the invasion of Ukraine by Russia, prices soared in March, in particular those of energy. At the same time, supply difficulties have increased, under the effect of new confinements in China linked to the health crisis.

The military operation in Ukraine also dented business confidence in March, S&P Global points out. They “say they are increasingly concerned about the repercussions of the war on an economy that is already struggling to recover from the pandemic,” said Chris Williamson.

In its last forecast in February, before the outbreak of the war, the European Commission had slightly revised its forecast for gross domestic product (GDP) growth for 2022 in the eurozone, to 4%.

Since then, the Commissioner for the Economy, Paolo Gentiloni, has warned that this figure should be revised downwards during the next estimate in the spring. Brussels does not foresee a recession at this stage. The military conflict in Ukraine “will not derail the ongoing expansion, but will weaken it,” Mr. Gentiloni recently asserted.

The March PMI survey “confirms our view of slower-than-expected growth this year, while inflation will exceed forecasts,” said Jack Allen-Reynolds for Capital Economics. He forecasts for the eurozone a rise in GDP of 2.8% and inflation of 6% this year.

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